Angel Liquidity Fund Idea

Continuing with yesterday’s post on the Pooled Angel Investor Liquidity Fund Idea, there’s another variation that’s more focused on making money as a fund while still helping with the liquidity problem that angels have in the market. Instead of angels putting a small portion of their equity into a pooled fund, the idea is for a dedicated fund that buys stakes at a discount from angel investors once their investments have raised money from institutional investors.

Here are a few ideas for an angel liquidity fund:

  • Focused on startups that raise institutional capital (much like Silicon Valley Bank and Square 1 Bank generally do for lines of credit)
  • Purchases equity at a discount to the most recent funding round (e.g. a 50% discount due to limited rights, lack of liquidity for the asset, etc.)
  • Only partial liquidity for the angel investor as it’s important for the angels to still have a stake in the startup
  • Geographic and/or industry/vertical specific (e.g. B2B Software-as-a-Service startups)

Here’s how an ideal example might work. An angel puts $100k into a startup for 5% of the startup, thus a $2 million post-money valuation. Then, 18 months later, the startup raises $3 million from institutional investors at a $10 million post-money valuation. The angel investor wants some liquidity and owns roughly 3% of the $10 million company after dilution (assuming the angel didn’t participate pro-rata in the round). On paper, the angel’s investment is worth $300,000, and the angel would like to get their original principle back, so they sell $200,000 of paper value for $100,000 in cash to the fund, while still owning $100,000 of paper value in the startup. Now, the angel investor is more likely to invest in additional startups and still has good upside from the existing investment.

Providing liquidity to angels and making money as a fund are both attainable, especially when more of the angel investments raise institutional rounds. This method might reduce the rate of return for the angel investors, but that’s expected due to increased liquidity.

What else? What are some more thoughts on the angel liquidity fund idea?

2 thoughts on “Angel Liquidity Fund Idea

  1. So, this is the opposite of doing follow-on rounds and would investors want you involved to the extent you are only in for the short term? Having investors in like this could be a negative sign for the start-up, similar to executives selling shares in publicly held companies. In my mind the angel should not be looking for liquidity early, but makes sense in theory as I have done this in regards to buying founder common stock to offer liquidity to founders for common shares at about a 50% discount to preferred.

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