Deciding in advance what would earn more capital removes the pressure, relationships and urgency that distort follow-on decisions when a request is already on the table.
10 min read · Level 5
Every follow-on decision I have seen go badly was made under time pressure by someone who had not decided what they were looking for. Writing the policy takes an hour and converts a series of emotional decisions into a series of comparisons. It also gives you something to say that is honest and impersonal when the answer is no, which is most of the time.
Follow-on requests arrive with a deadline, a relationship and often a sense of obligation. A policy written beforehand is the only version of your judgement that is not subject to those pressures.
A usable policy answers five questions:
Question Example answer What share of capital is reserved? 30% of the total programme What earns a follow-on? evidence improving on the metric my thesis names What disqualifies one? two consecutive bridges, or a thesis no longer applying Maximum per company? no more than 2x the initial cheque in total Who decides and when? me, within two weeks of a request, using the fresh money test
The criteria should be specific enough to apply under pressure. "The company is doing well" is not a criterion. "Revenue has at least doubled since my investment and retention has not deteriorated" is.
A maximum per company matters because follow-on requests come repeatedly from the companies that ask most, not necessarily those that deserve most. A cap prevents a single position absorbing reserves intended for the whole portfolio.
The policy should also be revisable - but revised deliberately, dated, and not in the week a request is pending.
Because follow-on decisions are made under exactly the conditions that produce poor judgement: time pressure, personal relationships, sunk costs and incomplete information.
A policy also makes declining easier and less personal. "My policy is to follow on where revenue has doubled since investment, which is not the case here" is a clearer and kinder answer than an improvised explanation.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
A policy in use over one year.
Request Company evidence Policy outcome Company A revenue 3x since investment, retention stable follow on, within cap Company B second bridge, milestone missed decline, disqualifying criterion Company C strong but already at 2x initial cheque decline, maximum reached Company D thesis no longer applies after pivot decline, thesis criterion
Three of four declines, each explained in one sentence with reference to a rule set before any request arrived. The investor deployed reserves into one company rather than spreading them across four under pressure.
Deciding follow-on policy while a specific request is pending, when the relationship and the deadline are already shaping the answer.
Decide what proportion of total capital is held for follow-ons before making initial investments.
Use measurable evidence tied to your thesis rather than general impressions.
Name the situations where you will not follow on regardless of other factors.
Set a maximum multiple of the initial investment.
Commit to responding within a set period, which is fairer to founders and prevents drift.
Before starting a private investing programme, and reviewed annually away from any live request.
Do not apply the policy so rigidly that genuinely exceptional situations cannot be considered. Exceptions should be rare, documented and explained against the policy.
Angel investors reviewing their portfolios frequently find that follow-on capital went disproportionately to companies that asked repeatedly rather than to those performing best, particularly where no written policy or per-company cap existed.
Without a policy, follow-on allocation is decided by who asks most often. A cap and written criteria change that.
Create a free account to read the rest and apply it to your own investing.