So you’ve decided to enter the world of angel investing. Perhaps you find the startup ecosystem fascinating and have accumulated some capital to invest in this growing asset class. Before you make your first investment, be sure to ask yourself these three questions.
Are you legally qualified to be an angel investor?
Ordinarily, companies that sell securities to the public must register their offering with the SEC. However, there are some exemptions for companies that are selling their securities only to “Accredited Investors”. These exemptions are the legal basis for most startup investments. The rules define an “Accredited Investor” as anyone who earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
Do you understand how angels fit into the startup funding landscape?
Angel investors and venture capitalists both play an important yet distinct role in the financial lifecycle of a startup company. Venture capitalists typically invest in startup companies at a later stage than angel investors. VCs make an investment after a startup has been validated in some form (metrics, customers, revenue, etc.) in order to provide capital to help grow the company and acquire market share. An angel investor will usually invest after a company raises money from friends and family (the first money a startup raises from outside investors) during a company’s Seed or Series A round (or an intermediate round known as a “Bridge” round). Rather than investing in companies with long proven track records, angels typically fund companies that have developed a Minimum Viable Product or prototype, or have achieved some substantial technical development and early market entry.
The nature of the money invested by angel investors and venture capitalists differs as well. Venture capitalists tend to make larger investments in startups, pooling the investments of multiple individuals and entities. Angel investors make smaller investments as individuals, usually ranging from $25,000 to $100,000, with their own money. The timing and nature of angel investments grant the potential for a large payoff but at the cost of increased risk.
Do I understand the angel-entrepreneur relationship?
The nature of an angel investor’s relationship with an early stage company makes angels particularly attractive to entrepreneurs. Angel investors don’t typically ask for board seats or additional rights, technically making them “passive investors.” This doesn’t mean that angels are not actively involved in helping the startups in their portfolio. As an angel, you can contribute significant value beyond your monetary investment. Angel investors can leverage their personal and professional networks to introduce entrepreneurs to potential customers, suppliers, distributors and new hires. Angels can lend their expertise to help startups grow, bringing a fresh perspective to a startup’s challenges. Angels with commensurate enthusiasm and experience can be tremendously beneficial, becoming brand evangelists for a startup.
For those who qualify, angel investing provides a unique opportunity for individuals to engage in impact investing and add value to early-stage companies by providing startups with much needed capital, strategic connections and valuable advice. Once you ask these three questions, understand the answers, and qualify as an accredited investor, then you will be ready to enter the risky but exciting sphere of angel investing.
This post was written by James Han on September 15, 2016
Three Questions to Ask Before Your First Angel Investment