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Saturday, January 17, 2009

The Serial Angel Investor

Have you ever wondered why successful angel investors almost always invest in more startups? Having gone through the vetting process of some 10-odd startups before settling on one, it's definitely work, and good startups don't come along frequently, but I've seen some angels invest in what I considered questionable businesses (for example, I once saw a startup that could not attract any engineers get funded with about $100,000 of funding --- even during the dot com bubble, this was clearly questionable).

It turns out that there's a roll over rule, whereby the gains from a previously held small business can be put into a new small business (and startups qualify), which means that the afore-mentioned $100,000 of investment really cost about $50,000 after the tax-break is realized. Now, there are all sorts of timing rules involved, but now you know why Andy Bechtolsheim could so casually write a $100,000 check to Larry and Sergey when they demo'd Google to him. Andy has done several successful rounds of startups before, and not only did he know a good thing when he saw it, but he was getting it at 50% off because of this rule!

Now, if you joined a startup early and exercised the options early enough (before $50 million of revenue is reached), then you too can qualify for this break. Yet another reason to pre-exercise your options (or at least some of them) when you join a startup.

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