A No-Nonsense Guide To Becoming An Angel Investor

hands holding money

An angel investor is an individual who funds early-stage (seed and startup) businesses in exchange for a percentage of equity. The majority of angel investors are retired executives who can offer fledging entrepreneurs valuable business experience as well as the needed capital. Angel investors sometimes pool their money in angel networks, allowing them to spread their risk among a number of opportunities.

Requirements for Angel Investors

A business startup seeking capital by offering or selling its securities is required to make a registration with the SEC unless it is entitled to an exemption. One frequently used exemption is selling securities to an accredited (angel) investor under Rule 501 of Regulation D.

Under this Rule, the angel investor is required to have a net worth, less the value of his or her primary residence, that exceeds $1 million individually or jointly if married; or have an annual income that exceeds $200,000 for each of the two most recent years, or joint annual income with a spouse that exceeds $300,000 for each of those years, and has a reasonable expectation of the same income for the year during which the investment will be made.

Getting Started as an Angel Investor

The easiest way for the novice angel investor to get started is to join a syndicate with an established angel investor. This lead investor generally does the due diligence and negotiates terms with the startup. Your responsibility is to simply write the checks while learning the ropes.

As for the ropes that you need to learn, they really aren’t that difficult. Since startups usually have little if any financials to share, angels primarily base their investment decision on the strength of the business idea and on the character and personality of the founders and their key people. If you’re going it alone as an angel investor, stick to investing where you have some background in the startup’s industry. This gives you a better frame of reference to evaluate the merits of the underlying business idea.

A number of online resources are available to help you analyze the potential of a startup, including Funders Club, Angel Co, and Circle Up. Once you have a short list of startups you’re interested in, you should also check for additional information at such online sources as Google, Facebook, LinkedIn, and Twitter.

The Only Two Numbers You Need to Know

When it’s time to start negotiating with a startup, you really only need to focus on two numbers: the amount of your investment and the startups valuation.

The valuation is critical because it determines how much stock you’ll be getting for your investment. Don’t worry too much about your stake being diluted by later rounds of shares sold to new investors. The founders generally can’t dilute your interest without diluting themselves. Look at it this way: each additional round of new investment will leave you with a smaller stake in a more valuable company. One tip from veteran angels: ask for a clause that prevents the founders from selling their stock for two to four years.

Luis Andres is blogging for i3Labs. He enjoys blogging about different ways to invest and how a startup can get funding.
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