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Basics of Angel Investing
1. What is angel investing?
2. How does angel investing differ from venture capital investing?
| VC’s | Angels | |
| Stage of Investment | Invest in early growth and established companies that have typically received founder, friends and family investment as well as angel investment previously. | Invest in seed and start-up companies that have previously received founder, friends, and family investment. |
| Source of Funds | VCs invest larger sums of money obtained from limited partners. VCs have limited personal financial responsibility. | Angels invest their own capital into startup companies receiving an ownership stake in return. Significant personal financial responsibility. |
3. What is the role of an angel investor in an early-stage startup?
Angels are more involved with the entrepreneur and bring guidance, networks, and knowledge to the startup company in addition to their capital investment. Angels keep close tabs on the startup’s affairs and in some cases become involved in decision-making to ensure their invested capital is used appropriately.
4. How do angel investors identify potential investment opportunities?
- Angels normally source their deals through established networks of startup founders and entrepreneurs within their ecosystem.
- Interactions with other investors including VCs can also be another source of deals for angel investors. For very new angels, ecosystem players like accelerators and incubators are a great place to start when looking for deal flow.
- Another way to find deals is to participate in an angel group, which allows you to tap into a community of angel investors who assess and invest in startup ventures together.
5. What is the typical investment size and duration for an angel investment?
There is no set investment minimum or size to be an angel investor, it just depends on the opportunity. An angel investor could support the startup with a one-time investment or ongoing capital contributions, depending on the company’s financing needs.
6. What are the common instruments used for making angel investments?
- Term sheet – it is the initial set of terms and one party offers to the other paving the path to negotiations and due diligence. A term sheet expresses the desired deal terms in advance hence reducing any potential disagreements. Term sheets are not binding apart from confidentiality clauses in them
- Convertible note – an investment instrument which at the option of the investor can convert into equity in the company. The conversion price and period is usually set in advance.
- SAFE – simple agreement for future equity formulated by Y Combinator as an alternative to convertible notes. It is more like a warrant where there is no interest paid and no maturity date, postponing the conversion price/ valuation to later priced funding round.
- DEBT – similar to conventional debt where one invests capital (principal) in exchange for fixed interest returns. The interest payments can be structured in more flexible terms and sometimes the debt is uncollateralized.