Thoughts on accredited investor requirements
In order to angel invest in a startup, you need to either have:
- a net worth of 1 million, or
- a salary of at least 200K
(see more at http://en.wikipedia.org/wiki/Accredited_investors).
I have a question for the startup community: is this law useful? In theory it protects 'unsophisticated investors' from scams, but in reality I think it just restricts the supply of angel funding.
I think changing this law could benefit both startup employees and the ecosystem at large.
The Employee:
The correlation of investment and equity ownership is undeniable. An angel who invests 10k in a seed round probably walks away with over 1% of the company immediately. Compare that to a salaried employee, who spends 4 years of their life working for a fraction of that angel's ownership. It would be nice if the employee could save up his salary and invest it in another startup, to compensate for his paltry ownership at the current gig.
The Ecosystem:
Paul Graham has implied that angel investment is the 'limiting reagent' in the startup ecosystem (from http://www.paulgraham.com/angelinvesting.html):
Assuming the current law can be changed in a way that increases angel investment, it stands to reason that such a change would benefit the entire startup community. The only other question is what the new law should be. I'll make a suggestion: expand the definition of an accredited investor to include anyone who has a bachelor's degree. It's hard to argue that someone possessing a college degree is unsophisticated, and the current law exists to protect unsophisticated investors.
Thoughts?
- a net worth of 1 million, or
- a salary of at least 200K
(see more at http://en.wikipedia.org/wiki/Accredited_investors).
I have a question for the startup community: is this law useful? In theory it protects 'unsophisticated investors' from scams, but in reality I think it just restricts the supply of angel funding.
I think changing this law could benefit both startup employees and the ecosystem at large.
The Employee:
The correlation of investment and equity ownership is undeniable. An angel who invests 10k in a seed round probably walks away with over 1% of the company immediately. Compare that to a salaried employee, who spends 4 years of their life working for a fraction of that angel's ownership. It would be nice if the employee could save up his salary and invest it in another startup, to compensate for his paltry ownership at the current gig.
The Ecosystem:
Paul Graham has implied that angel investment is the 'limiting reagent' in the startup ecosystem (from http://www.paulgraham.com/angelinvesting.html):
There probably aren't more than a couple hundred serious angels in the whole Valley, and yet they're probably the single most important ingredient in making the Valley what it is. Angels are the limiting reagent in startup formation.If angel funding is the scarcest resource, then increasing it should help the ecosystem as a whole. Even if these new investors aren't well connected, their investment will at least extend the life of a startup (PG also claims that avoiding death increases the odds of success: http://paulgraham.com/die.html).
Assuming the current law can be changed in a way that increases angel investment, it stands to reason that such a change would benefit the entire startup community. The only other question is what the new law should be. I'll make a suggestion: expand the definition of an accredited investor to include anyone who has a bachelor's degree. It's hard to argue that someone possessing a college degree is unsophisticated, and the current law exists to protect unsophisticated investors.
Thoughts?
1 Comments:
Please don't link to Wikipedia when quoting an SEC regulation. Link to the SEC instead.
http://www.sec.gov/answers/regd.htm
For exemptions, see
http://www.sec.gov/answers/rule504.htm
http://www.sec.gov/answers/rule505.htm
http://www.sec.gov/answers/rule506.htm
For definition of Accredited Investor, see http://www.sec.gov/answers/accred.htm
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