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04 Jan

BECOMING AN ANGEL INVESTOR: WHAT YOU NEED TO KNOW

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If you’re looking to enter the world of angel investing, you may be slightly intimidated. Where to start? Who to invest in? Where to find investments? What is expected of me?

These questions and more could be running through your mind, but getting started as an angel investor is actually quite easy. It’s this simple: you give a startup money and they give you stock.

It’s as simple as that.

The stock that you receive as an angle investor will either be preferred stock (stock with extra rights like getting your money back first in a sale) or convertible debt (which means you’re lending the company money and the debt converts to stock at the next sufficiently big funding round).

While there are some minor advantages to using either one of these stock options, it really doesn’t matter which one you use – so don’t get too caught up in the details of the deal terms, especially when you’re just starting out.

So, what’s the easiest way to get started?

First try finding a friend or colleague who’s already an angle investor and try getting included in his or her syndicates. Syndicates are when angel investors join together to invest on the same terms, and usually a lead investor negotiates the terms with the startup for the group. Through this option, all you have to do is write the checks – simple!

But at the same time, don’t feel like you have to join a syndicate. It’s still not that difficult to get started as an angel investor – even if you’re doing it on your own. Use some standard documents, such as the AA documents Wilson Sonsini and Y Combinator published online, to get your deal going and just make sure you have your lawyers review everything.

Next, when you begin negotiations with the startup, there are two main numbers you should really care about: how much money you’re putting in, and the valuation of the company. That’s because the valuation determines how much stock you get.

Second, and less obvious, is you should care about how much will be expected of you within the startup. Just like the amount you invest, this can vary a lot, depending on what you and the startup are looking for. You don’t have to do anything if you don’t want to, but always keep in mind that there are other ways to add value to a startup besides money as an angel investor.

But ultimately, you should try not to get too hung up on the mechanics or deal terms of an investment too much. To really become an angel investor – and be successful at it – you need to spend your time thinking about whether a company is good and finding winning startups to invest in.

In actuality, the hardest part of becoming an angel investor isn’t the mechanics of the deals, it’s about picking the right companies that will give you the most in returns. As an angle investor, you have to pick startups before others have realised they’re a hit.

So now where do you start finding these amazing startups? While there are plenty of ways to find them, especially the wide array of online resources, the best way to start is through referrals from your already established contacts. If you join a friend’s syndicate, this will be done immediately for you. If you don’t, ask your friends and family already in your circle of recommendations. Then, invest!

By investing and diving in, you’ll have a better chance of finding a steady stream of reasonably high quality startups. Why? Insiders in the angel investment world will be reluctant to send you any referrals until you’ve proven yourself by actually doing a couple investments.

So if you want to invest seriously, get started by working off your existing connections, look for good founds of winning startups, don’t get caught up in the mechanics of the deal and, overall, be a good investor in the startups you meet along the way and eventually you’ll start to get a steady stream of investment opportunity.

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