Being a good angel investor, just like being a good investor of any kind, isn't about knowing how to invest — it's about knowing when to sell.
In recent years, liquidation preference clauses have become the standard for VC funds worldwide, with adoption rates soaring from 65% of term sheets in 2015 to over 92% in 2023 according to PitchBook data.
Simple Structure, Massive Impact
Liquidation preferences give institutional investors the right to recover their initial investment (or a multiple of it) before founders and other common shareholders — including Angel Investors — can receive their share during a liquidity event.
These preferences typically come in four main flavors:
Simple Preference (1x) - Standard in 76% of European deals and 81% of US deals
Multiple Preference (1.5x to 3x) - Now present in 28% of late-stage deals, up from just 12% in 2019
Participating Preferred - Used in 44% of term sheets in 2023, up from 36% in 2020
Non-participating Preferred - Still dominant in early-stage (68% of deals)
Alarming Trends Backed by Hard Data
The recent tightening of terms is quantifiable:
2x clauses have returned in 19% of Series C+ deals in 2022-2023
Average time to exit has extended from 5.2 years in 2018 to 8.7 years in 2023
47% of unicorns valued in 2021 experienced down rounds in 2022-2023
Liquidation preferences absorbed 100% of sale proceeds in 23% of exits in 2022
WeWork stands as the perfect cautionary tale: during its valuation collapse from $47 billion to less than $5 billion, late-stage investors like SoftBank recovered a significant portion of their investment thanks to preference clauses, while early investors lost almost everything.
Devastating Consequences for Early Investors
For founders and especially angel investors, the statistics are brutal:
76% of angel investors recovered ZERO capital in exits under $100M in 2022
Across 649 tech exits in 2021-2022, angels recovered an average of only 0.7x their investment
83% of angels surveyed by AngelList admit they've never formalized an exit strategy
The mechanism creates a critical threshold effect where a sale below a certain amount yields nothing for common shareholders. Consider a concrete example: a startup that raises $40M in preferred equity across multiple rounds and eventually sells for $50M — initial angels recover only crumbs, sometimes less than 5% of the sale proceeds.
My Data-Driven Recommendation: The 2-2-2 Casino Rule
I strongly recommend angel investors apply my "2-2-2" rule:
Exit after 2 funding rounds
Recover at minimum 2x your initial investment via secondary sales
Reinvest in 2 new opportunities with the recovered capital
The numbers support this approach:
Angels following this strategy have generated a MOIC (Multiple on Invested Capital) of 3.8x versus 2.1x for those staying until the final exit
The average DPI (Distributions to Paid-In) after 7 years is 2.9x for disciplined angels versus 1.7x for others
The total loss rate (0x) drops from 67% to 41% with this method
Why This Is Crucial: The Data Speaks Volumes
Angel investors, due to the significantly higher risks they take compared to professional investors, must actively manage these risks:
The probability of an exit exceeding $100M is only 2.8% for early-stage startups
59% of startups that raise a Series A never make it to Series C
The average annualized return for angels practicing partial exits is 24.6% versus 17.9% for those who stay in
Revolut provides an illustrative case: angels who sold 30% of their shares after the Series B (at a $1.7 billion valuation) secured a 20x return on that portion, while the current valuation continues to fluctuate, and the ultimate exit remains uncertain.
Conclusion: Portfolio Discipline Is a Mathematical Necessity
Managing a portfolio, especially when it's not your full-time job, is a genuine challenge. Data from Cambridge Associates shows that angels applying strict exit rules outperform their peers by 42% over a ten-year period.
It's time to abandon the "ride or die" myth with your founders and adopt a more disciplined approach. In an ecosystem where 74% of term sheets now contain cascading liquidation preference clauses, your exit strategy becomes as important as your entry strategy.
The numbers don't lie: angel investors who know when to sell consistently outperform those who only know how to invest.
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Catch you soon!
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Such a great article!