What Smart Angel Investors Think About Before Writing a Check

Writing a check to a startup you believe in is exciting. It’s also one of the riskiest investments you can make. Whether you’re an angel deciding where to invest or a founder pitching one, it helps to know how good angels think. It starts with why. Some angels want to pay it forward by backing founders who remind them of their younger selves. Others want to diversify. Your reason will shape everything else.

From there, the key questions are what you’re looking for, how much you’ll invest and over what timeline, what you bring beyond money, and how the deal gets papered. One threshold point: most startup rounds are open only to accredited investors under SEC rules. For individuals, that generally means income above $200,000 ($300,000 with a spouse or spousal equivalent) in each of the last two years, or net worth over $1 million not counting your primary residence.

What Are You Looking For?

Angels tend to invest in what they know and in people they believe in. Before you invest, or before you pitch an angel, get clear on what a good fit looks like.

Start with the business. What problems do you care about, and what industries do you understand well enough to judge? Then the founder. Do you want a repeat founder with a track record, or a first-timer coming from a different career, like a medical researcher turned software founder? There’s no right answer, but you should know yours.

Your Investment and Timeline

Decide how much you’ll put into startups overall, and spread it across several companies. Most angel investments won’t return their capital, and a small number of winners usually drive the returns. Hold back money for follow-on investments, too. If a company does well and you have pro rata rights, you’ll want capital ready to use them in later rounds instead of watching your stake get diluted. And plan to wait. Startup exits often take many years, if they happen at all.

Your Added Value

The best angels bring more than a check. Many mentor founders, open doors to customers and investors, or help with hiring. What’s your expertise, and which companies would benefit from it? Founders notice the difference.

Read the Paperwork 

Most angel checks go in through a SAFE or a convertible note rather than a priced round. The terms that matter most are the valuation cap, any discount, whether you get most favored nation (MFN) protection, and whether you get pro rata rights in future rounds. Small differences in these terms can change what your investment is worth at the next financing.

Get the Terms Right Before You Wire the Money 

Whether you’re writing your first angel check or raising from angels as a founder, the deal terms matter. Triumph Law’s startup and venture attorneys represent founders and investors, so we see these deals from both sides. Contact us today with your questions.

Triumph Red Flags Review

For angel investors who are not leading the investment, Triumph offers reasonably priced flat-fee “red flags” review that helps you understand any out-of-market exposure or risk, and to address specific concerns you have as an investor. Sometimes, those reviews return a clean bill of health, and our angel investor clients can invest more confidently knowing it’s been reviewed.

Sometimes we identify gaps or risks that give our investor clients pause, often solved by a simple side letter offering special rights.

Source:

angelcapitalassociation.org/