''' I’ve been lucky enough to be part of some incredible success stories. I’ve built and sold two companies, RemoteTeam to Gusto and MovieLaLa to Gfycat. I’ve invested in over 200 startups, including giants like Anthropic, OpenAI, and Scale AI. People see the wins. They see the headlines and the big numbers. What they don’t see are the brutal lessons learned along the way. The mistakes that cost you money, sleep, and a piece of your sanity.
This is the story of one of my biggest mistakes. A mistake that cost me a cold, hard $100,000.
It was a few years ago. I was still relatively new to the angel investing game, at least compared to where I am now. I had a few small wins under my belt and was starting to get a feel for the rhythm of the Valley. I was hungry for the big one, the 100x return that every investor dreams of. And I thought I had found it.
The "Perfect" Deal
The company was a hot new startup in the secondary market space. Let’s call them “SecondWave.” They were building a platform to make it easier for employees of pre-IPO companies to sell their stock. The founder was sharp, the deck was polished, and the market was ripe for disruption. I was hooked.
I got in on a late-stage secondary deal. The valuation was high, but the company was on a rocket ship trajectory. I put in $250,000. I ran the numbers, and I was convinced this was it. This was the investment that would put me on the map.
I remember the feeling of excitement when I signed the term sheet. It was a thick document, full of legal jargon, but I thought I had a handle on it. I’d seen enough of them by then. I focused on the big things: valuation, liquidation preference, pro-rata rights. The stuff everyone tells you to look at.
The Devil in the Dilution Clause
What I didn’t pay enough attention to was the dilution clause. It looked standard. It mentioned that my shares would be subject to dilution from future financing rounds. Of course, I knew that. Every investment gets diluted. It’s just part of the game.
What I missed was the fine print. The term sheet had a clause that gave the company the right to issue a massive new pool of options for new employees before the next funding round. And not just any pool, a pool that was a significant percentage of the company’s fully diluted capitalization.
I read it, but I didn’t understand it. I assumed it was just standard legalese. I was so focused on the potential upside that I skimmed over the downside protection. I didn’t model it out. I didn’t ask the hard questions. I just signed.
The Phone Call
Fast forward six months. The company was doing well. They were gearing up for their next big funding round, a Series C that was going to be at a huge up-round valuation. I was already counting my chickens. My $250,000 was going to be worth millions.
Then I got a call from the founder. He was excited. He told me the round was closing, and the valuation was even higher than they had projected. He sent over the updated cap table.
I opened the file, my heart pounding. I scrolled down to my name. And my heart sank.
My ownership percentage had been decimated. It was a fraction of what I had calculated. The new option pool, combined with the Series C financing, had diluted my stake so much that my $250,000 investment was now worth less than I had put in. I had lost $100,000 on paper before the company had even had a chance to exit.
I felt like an idiot. I had been so blinded by the promise of a huge return that I had missed the most basic, fundamental part of the deal. I had failed to protect myself.
The Brutal Lesson
Losing that $100,000 was one of the most painful but valuable lessons of my career. It taught me that in venture capital, the devil is always in the details. A great team and a hot market are not enough. You have to understand the terms of the deal, inside and out.
Here’s the brutal lesson I learned: Valuation is vanity, ownership is sanity.
Everyone gets obsessed with valuation. Is it a $10 million company or a $20 million company? Is it a 2x up-round or a 3x up-round? It’s easy to get caught up in the hype. But a high valuation means nothing if your ownership stake gets wiped out by dilution.
I learned that day that I would rather own 10% of a $10 million company than 1% of a $100 million company. It’s not about the headline number. It’s about how much of the company you actually own.
My New Term Sheet Checklist
After that experience, I created a new checklist for myself. I go through it every single time I look at a term sheet. I don’t care how hot the deal is or how much I like the founder. I never skip this step.
Here are a few of the questions I now ask myself:
- What is the true, fully diluted share count? Not just the outstanding shares, but all the options, warrants, and any other convertible securities.
- What are the exact terms of the option pool? How big is it? When will it be created? Who has to approve it?
- What are the anti-dilution provisions? Are they full ratchet or weighted average? How will they protect me in a down round?
- What are the liquidation preferences? Is it participating or non-participating? What is the multiple?
- What are my pro-rata rights? Do I have the right to invest in future rounds to maintain my ownership percentage?
I’m not a lawyer, and I don’t pretend to be. But I’ve learned that I need to understand these things as well as any lawyer. I need to be able to model them out in a spreadsheet and see exactly how they will affect my investment in different scenarios.
Don’t Be Afraid to Ask the Dumb Questions
My biggest mistake was that I was afraid to look stupid. I was in a room with experienced investors and a hotshot founder, and I didn’t want to be the guy who asked the dumb question about the option pool. So I stayed quiet. And it cost me $100,000.
Now, I’m the guy who always asks the dumb questions. I don’t care if it slows down the meeting. I don’t care if it makes me look inexperienced. I would rather look stupid for five minutes than lose a hundred thousand dollars.
If you don’t understand something in a term sheet, ask. And keep asking until you do. If the founder can’t explain it to you in simple terms, that’s a huge red flag. It either means they don’t understand it themselves, or they’re trying to hide something.
The Real Win
I never made my money back on that deal. The company eventually had a modest exit, but my stake was so small that it didn’t even cover my initial investment. But I still consider it one of my biggest wins.
It was a win because it taught me a lesson that has made me millions of dollars since. It taught me to be a smarter, more disciplined investor. It taught me to focus on what really matters: ownership.
So next time you’re looking at a hot new deal, and you’re getting caught up in the excitement, take a step back. Take a deep breath. And read the damn term sheet. Every single word. It might not be as exciting as dreaming about a 100x return, but it might just save you from losing $100,000. '''
Frequently Asked Questions
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.