David Cummings on Startups

Service Providers as Angel Investors

Written by

David Cummings

in

Continuing with the recent post The Tourist (Investors) are in Town, there’s another element that I’ve seen more lately: service providers as angel investors. Now, lawyers can’t invest due to a conflict of interest, but PR, marketing, commercial real estate, and other types of service providers can, and do, invest. In fact, there’s an angle with a number of service providers to invest cash in a startup with the expectation that an equivalent or greater amount of money will be spent with them.

Here are a few thoughts on service providers as angel investors:

  • Angel investors, depending on the rights, will have information access and other types of data that you might not want a service provider to have
  • If taking money from a service provider, it’s important to discuss long-term relationship expectations (e.g. if you take money from a commercial real estate broker, are you going to funnel all business to them indefinitely?)
  • Decide on the value the service provider will provide by paying them their standard rate vs getting in much deeper and having them as an investor

The next time a service provider offers to invest, carefully separate out the value as an angel investor from that of a service provider, and try to keep the two items independent.

What else? What are some more thoughts on service providers as angel investors?

Comments

2 responses to “Service Providers as Angel Investors”

  1. Jeff Mikes Avatar
    Jeff Mikes

    David – I chose not to use the comment function due to the fact that I’ve recommended your blog as a bit of a bible/exec ed course to several SaaS CEO’s that are clients. I’m curious of your view on “post market fit but pre repeatable customer acquisition process” SaaS firms asking service providers to work for at least some equity. I love it in concept but often have a hard time balancing their expectations for always on services following an investment by us. Sure I’ll trade a discount for equity but how do you avoid being abused?

    Reply
  2. Anand Thaker (@AnandThaker) Avatar
    Anand Thaker (@AnandThaker)

    Having done a few options with my previous company – traded equity for services, client-only, working with the VC directly to help portfolio clients and angel-invested directly – the most fruitful (and responsible) options have been to keep the relationship separate. I’ve seen too often intertwining those roles put an unnecessary strain on the relationship. While not intentionally or felt right away, one side ends up feeling taken for granted.

    Either your playing the role of an angel/mentor or the service provider – why cause a distraction from your focus?

    Reply

Leave a reply to Jeff Mikes Cancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

More posts