A Killer Guide to combining an Angel Army with Stacked Notes

Jason Yeh
May 10, 2022

Use this strategy to really jump start an early stage fundraise

Out of everything I've produced, I’m most known for my content on Calendar Density. It’s a simple way of describing the most optimal setup of a high-performing fundraise.

After Calendar Density, the next two most popular concepts I covered in my work have been the Angel Army and Stacked Notes. My essay on raising an Angel Army is one of our most-viewed of all time and on my podcast Funded, Sam Corcos from Levels outlined his masterful use of note stacking in our most popular episode ever.

While Stacked Notes and Angel Army are separate fundraising strategies that can be used independently, they are increasingly being launched in tandem. How? That’s what this essay is about.

To start, let’s review the concepts…

Angel Army is a focused strategy that targets the addition of angels to a cap table for their strategic value as opposed to their operational capital. This strategy emphasizes the benefits that even tiny checks like $5k can have on future abilities to attract talent, close business, and raise capital. Until recently, adding small checks was not as common because of the distaste for managing larger cap tables. Tools like Carta, Clerky, and others have relieved the administrative burden of collecting small checks thus making way for Angel Army strategies.

Stacked Notes refers to a strategy of raising successive non-equity rounds (convertible notes or SAFEs) with higher valuation caps. The power of Stacked Notes comes from the scarcity, urgency, and momentum each note with limited capacity adds to a fundraising process. This strategy was uncommon as recently as two years ago when there was much more power in the hands of investors. With that dynamic, investors often rejected any approaches to fundraising that felt abnormal. In the last couple of years though, a few trailblazing entrepreneurs have executed very visible stacked note strategies. When Sam Corcos ran this process, he drove a ton of excitement around his deal which landed some high profile angels as well as A16Z as an eventual lead investor. The Levels fundraise as covered in Funded helped make the strategy much more commonplace and accepted in the investor community. (Disclaimer: while I love the stacked notes strategy, I’ve also written about the dangers of stacking post-money SAFEs

Each of those two strategies on their own are valuable for different reasons, but the combination has a very Captain Planet effect where the combination is greater than the sum of the parts. 

With our powers combined…

It’s a match made in heaven, and the process of joining the two is fairly straightforward. 

You start with the simple Angel Army strategy and simply add the dynamic of multiple follow-on tranches that have limited capacity. 

The key to executing any Stacked Notes strategy well is establishing initial credibility, which can turn into your momentum. There are a few ways to do this, but it always starts with a compelling story that gets people to lean in. The beauty of combining an Angel Army strategy with Stacked Notes is the credibility of the Angel Army can build momentum and trigger the filling of the first tranche in a Stacked Note strategy. If you can convince even one tiny angel to get on board, you now have your initial credibility that leads to filling an initial tranche. After your first tranche / first note is filled, you push the demand from investors to fill the next note at a higher valuation cap and again limit how much money you take. As that note fills you can choose to again close it off and open up another note at a higher cap and so on…

One hack to kicking off substantial momentum is to set up an initial tranche that is priced below market with very little room. You can market it as a highly strategic raise from angels where you only want super targeted value with a cap on check size. Because it’s smaller, you can offer that deal to a few angels who will rush to get the better price. Once you fill that quickly, you now have the opportunity to talk about how oversubscribed it is and use the excess demand to open up the next tranche of stacked notes. 

As you think about executing the strategy, make sure you plan out your potential tranches so you understand how much dilution you're willing to take. One awesome part of the angel army plus stacked note strategy is you don't have to fill them. The message to the market is you're raising the capital to add strategic value not operational capital so there’s no pressure. Momentum might push you to raise more money… but you don't have to. There's no shame in not filling a tranche. 

With no shame and less pressure, your communication with the investor community will be much more compelling. There's reverse psychology in play by saying you don't want it or you don't need it. Nothing excites an investor more than hearing “no.” 

So once you've started the process of getting checks to commit, it's all about leveraging that momentum and accentuating the scarcity of each tranche. This in turn creates more pressure and more momentum. If you’ve followed the Angel Army playbook and raised your first tranche mostly from credible angels, their association with the investment combined with the limited space will help add more scarcity and heat to the process. 

And of course, you will be communicating all of this to interested investors along the way.

Examples of this: 

  • “I just had three meetings this morning and a few more after this call.” 
  • “We have 50% of the round of this tranche committed. There’s still 50% left but we have more meetings the rest of this week.”
  • “We’re waiting on more final confirmations but still have room. Let me know if you're interested.” 
  • “If you don't make it into this tranche, we will be opening one more tranche at a higher valuation. So just let me know if you want to come into this SAFE. Either way we’re excited to work with you.”

With a Stacked Note strategy, you'll want to plan the same way you would with a traditional, large round. Just because a Stacked Note strategy sounds like it’s a piecemeal process doesn’t mean the most optimal version of it is done in piecemeal. Do your research ahead of time to know which investors you're targeting so you're ready to go all at once. As you start the process, all the investors you connect with will come from your initial research. Once people commit, you will fill notes with limited space and start pushing people to newer and higher valuations.

It's truly amazing how fast the market is moving and how fluid things are. Two years ago I was telling people how off-putting it was that a founder had approached me telling me they were about to close a note and raise the valuation cap. Now I'm writing an essay on how more founders can take advantage of that same strategy. 

As always, these strategies don't land money on their own. They simply accelerate or enhance the abilities of quality, venture-backable companies to raise capital. Remember to always focus on the core value of your company before turning to advanced fundraising techniques like Angel Armies, Stacked Notes, or the combination of the two.

BTW- Many founders fail to understand the difference between Pre- & Post-Money SAFEs. It's critical you understand the distinction and implications. Check out the side by side comparison (I've chosen two scenarios with the same effective post-money valuations):

If you'd like to play around with the model yourself, check it out here-> https://docsend.com/view/etr43gj67d2kb5pm

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