Follow-On Capital Reserve Rule
Reserve a second check whenever you make an early-stage investment
- Difficulty
- Easy
- Time to result
- ~ongoing to results
- Steps
- 4
- Confidence
- 91%
Sharran Srivatsaa says his angel-investing group assumes that every initial startup investment may require a follow-on round. When the group decides how much it can commit to a company, it effectively doubles the first-check amount in its capital planning by reserving an equal amount for later. The rule does not require blindly writing the second check; it ensures the potential exposure is recognized from the start. This protects portfolio liquidity and makes a later financing request less surprising. The mechanism is deliberate exposure planning: size the possible two-check relationship before making the first investment, preserve capacity for the later request, and then decide whether the company's progress justifies deploying that reserve.
Origin
Extracted from Coffeez for Closers. Sharran Srivatsaa described the reserve rule his angel-investing arm developed across roughly 24 or 25 investments.
Core principles
- 01An initial startup check rarely represents the full capital commitment
- 02Follow-on funding should be planned before the first investment
- 03Reserve discipline prevents later rounds from becoming a surprise
- 04A reserve creates capacity without requiring another investment
How to run it
- 1
Define total exposure
Decide how much portfolio capital the company may receive across both its current and likely next round.
Pro tip Treat this as the commitment under review, not just the smaller first check.
- 2
Write the first check
Deploy only the initial portion while keeping an equal amount available in the portfolio plan.
Watch out Do not size the first investment as though no further financing will be requested.
- 3
Reserve the follow-on
Keep the second portion uncommitted but explicitly allocated for a possible later round.
Pro tip Track reserved capital alongside deployed capital when reviewing portfolio capacity.
- 4
Re-underwrite before funding
When the follow-on round arrives, reassess the company and decide whether the evidence justifies using the reserve.
Pro tip A reserve creates capacity, not an obligation.
Watch out Do not let prior investment alone justify throwing more capital after a weak position.
In the wild
Sharran's angel arm found that none of its portfolio companies simply took one check and declared that no more capital was needed. The group therefore plans an equal follow-on reserve whenever it makes an initial investment.
→ The portfolio recognizes likely future funding needs when the first allocation is made.
Common mistakes
Counting only deployed cash
Ignoring the likely second round overstates the capital still available for other investments.
Making the reserve automatic
Planning capacity for a second check should not remove the need to assess the company again.
Is it for you?
Best for
It is best for angel investors whose portfolio companies commonly raise follow-on rounds.
Not ideal for
It is not ideal as an automatic promise to fund a weak company regardless of later evidence.
From the transcript
“most of these companies need follow on round”
“whatever we commit to one we double our investment because we know that there's never not one time being a company that we've written one…”
From the episode
Real Entrepreneurship Spirit with Sharran Srivatsaa