How to angel invest, part 1: the high-level

If you’ve never done an angel investment, it can feel like a scary, impossible thing. It conjures images of super wealthy people — usually white, usually men — who seem to have been born knowing how to do it. But it doesn’t have to be that way. Anyone can angel invest, as long as you have skills that founders will find useful and at least $2,200. (That’s such a specific number because of crowdfunding rules under the JOBS Act).

This guide is for anyone who wants to start angel investing in tech companies. It’s not written for a sophisticated audience, but I assume you have a background with tech startups. There’s this trend that everything VCs put out publicly is supposed to be founder-friendly, but this is angel-friendly first. Yet because the tips I’m providing here are brutally honest, it’ll be useful to founders, too. As a founder, you should know how angels may think about you and your company, even things that are tough to hear.

Lastly, this guide uses AngelList as a platform for angel investing. It’s all online, it’s simple, and it’s fast. That said, you can use these tips with traditional offline angel investments; just ignore the bits about AngelList.

Table of contents

So you can glance at where we’re headed.

The high-level
Debt vs. equity
Key terms in notes, SAFEs, and term sheets
Company stages
Deal flow
Good founder qualities (and red flags)
The market
Due diligence
Defining your filter
Your involvement as an angel
Waterfalls and getting paid back
Carried interest, or “carry”
Example scenarios
Books for further reading

The high-level

Only two things really matter in angel investing: the people and the market. Is the team exceptional? Do they have expertise and authentic passion for what they’re building? Is the market opportunity big enough? Is now the right time to build this company?

By far, the most important thing you will do as an angel is pick and bet on companies. If you pick companies that win big, you will too. Details like terms and paperwork don’t matter much; they only come into play with companies that lose money or come out roughly evenly. For example, if you were an angel in Uber, you won. It doesn’t matter whether you invested on a SAFE or a convertible note or in an equity round: you won.

Most of your angel investments will fail. You will lose money 80–90% of the time. If you do 20 investments, the odds are that one to two will return your entire investment amount (plus profit on top). That’s why it’s important to see a lot of companies, pick only the absolute best, and understand that even then, most of them will not be successful. The successful ones will take years to have an exit, usually at least five and sometimes up to ten.

Angel investing is about volume because of the probabilities I just described. If you’re not willing to invest in 20 companies over several years, you shouldn’t be an angel investor.

Here are 11 other high-level angel investing tips from Spearhead if you’d like to go deeper.

Nothing in this guide matters as much as you understanding these high-level points, so I’ll leave you here before we pick up again in part 2: debt, equity, and terms.

Questions so far? I’m sarah(at)accomplice(dot)co and @SarahADowney on twitter.