Angel Investing Isn’t What It Used to Be (Here’s Why)

After 15 years and 53 angel investments, I hit pause—and then pulled back the curtain on how my portfolio really performed (ironically, right before my first portco IPO). The TL;DR? Angel investing is overly romanticized, usually opaque, and often stacked against early believers.

So I called up my podcast co-host, Michael Esquivel—partner at Fenwick & West, Stanford professor, angel investor, and startup whisperer—and his partner, Aaron Ginsburg, to ask some hard questions. Michael and Aaron have represented hundreds of startups, including my own, and share tips on how to better protect a startup’s earliest believers. We discuss:

• What exactly has changed and why (hint: SAFEs are partially to blame)

• Why early investors often get left with nothing—even in an exit

• What rights (if any) angels can ask for without getting laughed out of the round

• What founders can do to protect their earliest supporters

Let’s dive in.

Halle: Why do early angel investors often get the short end of the stick?

Let’s start here. Why do so many early investors (and early employees, too) end up with nothing—even when the company gets acquired?

Michael: It all comes down to how the capital stack is structured. Venture investors typically hold preferred stock with liquidation preferences—but before they see any return, debt and transaction expenses are paid first. If later-stage investors have senior liquidation preferences, they get paid ahead of earlier investors and common shareholders. By the time these obligations are satisfied, there may be little or nothing left for employees or angel investors.

Aaron: Angels also tend to invest through SAFEs or convertible notes, which are fast and cost-effective but offer limited investor rights. They usually don’t come, for example, with a board seat or vote, so they’re not part of the key decisions down the road, especially in tough situations like recaps or down rounds.

It’s not about bad actors—it’s just how the structure works. That’s why diligence and investing in strong founders is so important as it increases the likelihood of a great exit, which benefits not only all investors (angel investors included) but also all employees.

Halle: Is it just me, or does the game feel different now?

We’ve talked about the macro headwinds that have emerged post-COVID, and the downrounds and recaps that followed. But beyond this, the dynamics on the ground feel very different from what they were in the 2010s. Starting maybe about 5ish years ago, startups began raising more capital, at higher valuations, and late-stage investors seem more aggressive, often restructuring the cap table in ways that squeeze early backers.

Aaron: It’s not just you—the landscape has changed. In the last five years, startups raised bigger rounds at higher valuations, and late-stage investors started pushing harder for downside protection. That’s led to more recapitalizations, more structured (non-market) terms, and more situations where early investors get diluted or pushed even further down the liquidation stack.

Michael: There’s also been a lot of volatility—2021 through early 2022 was incredibly strong, but the post-COVID crunch hit hard. Some sectors, like AI, remain hot, while most others have cooled off.

But there’s still a ton of opportunity out there—especially for angels who focus on good operators, trusted referral networks and experienced co-investors. The bar is just higher now, and the path to success looks different than it did in the 2010s. Diligence matters now more than ever as investors are seeking businesses that have clear paths to profitability and growing in economically sustainable ways.

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Halle: Is the SAFE structure part of the problem?

We all love how fast SAFEs are… until they’re not. Do SAFEs (and their opacity around valuation/dilution) contribute to why angels end up with less protection?

Aaron: SAFEs are great for speed and simplicity, but that comes with trade-offs. SAFEs are intentionally light on rights, so angels don’t usually get pro rata, info rights, or a say in how future rounds are structured. And with uncapped SAFEs (i.e., SAFEs that don’t include a valuation cap), it’s hard to know what you’re really buying until the next round sets the terms.

That lack of clarity can leave early investors exposed—especially if the next round is messy or overly structured. SAFEs aren’t inherently a problematic investment vehicle, but they naturally require more trust in the founders, the business and the overall deal.

Halle: What’s the deal with recapitalizations?

What does a recap actually mean in practice? And can founders and angels do anything to protect themselves?

Aaron: Recapitalizations happen when a company restructures its ownership and terms, often to bring in new investors or adjust valuations after a down round financing. We’re seeing more of these now as companies that raised heavily during the COVID-era adjust to current market realities.

Recaps are typically led by lead or later-stage investors who help the company reset and attract new capital. These deals often involve restructuring that can impact earlier investors, like dilution or changes in preference terms. Since angels usually hold smaller stakes and fewer rights, they may have limited input in how the terms are shaped.

For example, sometimes recaps include pay-to-play provisions, which require investors to put in additional capital to maintain their ownership or liquidation preference. Angels who can’t or won’t invest more can get penalized—especially if preferred stock converts to common stock, reducing their rights and value.

Halle: A lot of angels asked what they can do to avoid these things. Is there an answer?

Are there any specific rights, clauses, or strategies angels can push for—without getting laughed out of the round?

Michael: Angels can try to protect themselves by negotiating pro rata rights, info rights, or veto powers upfront, and maintaining a reserve for follow-on investment. And doing thorough diligence and investing with trusted founders and experienced co-investors helps minimize surprises. And if angel investors can maintain strong connections to the founders/management team, we sometimes see that pay-to-plays are structured to exempt smaller investors by, for example, only have that pay-to-play apply to major investors.

Aaron: That said, early-stage rounds can be competitive and founders may push back if demands feel too heavy for the check size.

The best strategy pairs reasonable legal protections with thorough diligence. Investing through trusted networks, backing founders with strong track records, and co-investing with experienced investors all help reduce risk and build confidence. Spreading investments too broadly can limit an angel’s ability to provide meaningful follow-on support. Focusing on fewer, high-quality deals helps angels add value, stay engaged and better protect their investments.

So yes, there are rights and clauses to ask for—but equally important is smart, informed investing and building meaningful relationships in the startup ecosystem.

Halle: Similarly, a lot of founders asked what they can do to ensure their early supporters don’t get screwed over. What advice do you have for them?

VCs drive most of the capital, but angels write the first checks and take the biggest risk. In your view, how critical are angels to the startup ecosystem—and how can founders better protect them?

Michael: Angels are so critical to the startup ecosystem! They’re often the first believers—taking the biggest risks before VCs step in. Beyond capital, angels frequently bring operator experience, robust networks, and valuable guidance at a crucial stage. Founders should recognize that early support is about more than just money—it’s about trust, mentorship, and community.

To protect their angels, founders should be transparent about fundraising plans and potential dilution, and aim to negotiate fair terms that don’t disproportionately squeeze early investors. Reserving allocation for early backers in future rounds also helps maintain their stake.

Aaron: Yeah, building strong relationships with angels—treating them as partners rather than just checks—creates goodwill and trust that extends well beyond the first round. That type of respect and open communication benefits everyone involved.