Everyone loves to brag about their wins. You see it all over Twitter and LinkedIn—the 100x returns, the successful exits, the unicorn valuations. It’s a highlight reel. But nobody talks about their losses. The real, gut-wrenching, “what was I thinking?” kind of losses.
Well, I’m going to talk about one of mine. A big one. I once lost $500,000 on a single deal. It was a rookie mistake, and it was painful. But it also taught me a lesson that has been worth far more than what I lost. I’m sharing the raw story so you don’t have to learn this lesson the hard way.
The Deal That Looked Too Good to Pass Up
This was a few years ago. I was already an active angel investor, and I had a few good returns under my belt. I was feeling confident. Maybe a little too confident. An opportunity came across my desk to invest in a hot, late-stage company through a secondary market transaction. For those who don’t know, a secondary market is where you can buy shares from existing shareholders (like employees or early investors) instead of directly from the company.
The company was a household name. Their product was everywhere. The metrics looked incredible. Everyone was talking about them as the next big IPO. The opportunity was to buy shares at a significant discount to their last private valuation. It felt like a no-brainer. Here was a chance to get into a top-tier company that I had missed in the earlier rounds. I put together a Special Purpose Vehicle (SPV) and raised money from some of my LPs. I put in a significant chunk of my own capital too. In total, we invested $500,000.
Where It All Went Wrong
So what happened? The company didn’t fail. They didn’t go bankrupt. In fact, they did go public a couple of years later. But we lost everything. How?
The problem was in the fine print. The shares we bought were subject to a Right of First Refusal (ROFR) from the company. This is a common clause in startup stock agreements. It means that before the seller can transfer their shares to a third party (us), they have to offer them to the company first at the same price. Usually, companies don’t exercise their ROFR. It’s a hassle, and they often want to keep their early employees and investors happy.
But this company was different. They were notoriously aggressive. And they were preparing for an IPO. They wanted to clean up their cap table and control who owned their stock. So, they exercised their ROFR. They bought the shares themselves, and our deal was dead. We got our money back, but we had spent a ton on legal fees and due diligence. And more importantly, we had wasted a lot of time and energy.
But that’s not even the worst part. The seller we were buying from? They turned around and sold their shares to another buyer at a higher price. We were just a pawn in their game to get a better valuation. We got played. And it cost us half a million dollars.
The Brutal Lesson: You're Not in the Inner Circle
Losing that money was a wake-up call. It taught me a brutal but necessary lesson about secondary markets. When you are buying on the secondary market, you are not in the inner circle. You don’t have the same information as the company, the early investors, or even the seller. You are an outsider. And that information asymmetry is a huge risk.
I had focused on the company’s metrics, the product, the market size. All the things you’re supposed to look at. But I had completely overlooked the most important thing: the people and the relationships. I didn’t have a relationship with the company. I didn’t have a relationship with the seller. I was just a transaction to them. And in the world of venture capital, being just a transaction is a very dangerous place to be.
My New Rule for Investing
That experience fundamentally changed how I invest. I still do secondary deals, but I have a new rule. I will only invest in a company on the secondary market if I have a pre-existing relationship with the founders or the board. I need to be able to pick up the phone and talk to them. I need to understand their thinking. I need to know that they are not going to screw me over.
This rule has saved me from making the same mistake again. It has forced me to focus on what really matters in this business: people. It’s not just about the numbers. It’s about trust, relationships, and being in the inner circle. If you’re not, you’re just gambling. And $500,000 is a lot to pay for a lottery ticket.
So next time you see a hot secondary deal that looks too good to be true, ask yourself one question: Am I in the inner circle? If the answer is no, walk away. It’s a lesson that cost me $500,000. For you, it’s free.
Frequently Asked Questions
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
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.