Introduction
Angel investing involves providing capital to early-stage startups in exchange for equity or convertible debt. It’s a high-risk, high-reward investment class that allows individuals to support innovation while potentially generating significant returns. This cheat sheet provides a comprehensive framework for both new and experienced angel investors to evaluate opportunities, structure deals, manage portfolios, and navigate the unique challenges of early-stage investing.
Core Concepts & Principles
Investment Fundamentals
- Angel Definition: Individual who invests personal capital in startups at early stages (pre-seed/seed)
- Typical Investment Range: $25,000-$100,000 per deal
- Expected Hold Period: 5-10 years (illiquid investments)
- Return Profile: Follows power law – ~10% of investments generate ~90% of returns
- Portfolio Approach: 20-25 investments recommended for adequate diversification
- Risk Mitigation: Invest no more than 5-10% of investable assets in angel deals
Key Investment Criteria
| Criterion | What to Evaluate |
|---|---|
| Team | Founder experience, domain expertise, adaptability, communication |
| Market | Size (TAM/SAM/SOM), growth rate, competitive landscape, barriers to entry |
| Product | Problem solved, solution uniqueness, product-market fit evidence |
| Traction | Revenue, user growth, retention metrics, unit economics |
| Business Model | Revenue streams, margins, scalability, CAC/LTV ratio |
| Exit Potential | Likely acquirers, comparable exits, IPO viability |
Investment Process Step-by-Step
1. Deal Sourcing
- Join angel groups/syndicates (e.g., AngelList, Gust)
- Attend startup pitch events and demo days
- Network with entrepreneurs and other investors
- Connect with accelerators/incubators (Y Combinator, TechStars, etc.)
- Establish domain expertise to attract relevant deals
- Leverage professional networks (LinkedIn, industry associations)
2. Initial Screening
- Review executive summary or pitch deck
- Conduct preliminary market research
- Assess team backgrounds and track records
- Evaluate alignment with personal investment thesis
- Check initial valuation expectations
- Consider potential contribution beyond capital
3. Due Diligence
- Commercial
- Product demo and technical review
- Customer interviews and references
- Competitive landscape analysis
- Market size verification
- Financial
- Review financial model and assumptions
- Analyze historical financials (if available)
- Assess funding history and cap table
- Evaluate burn rate and runway
- Legal
- Verify corporate structure
- Review IP ownership and protection
- Check for pending litigation
- Assess regulatory compliance
- Team
- Founder background checks
- Reference calls with previous employers/investors
- Assess team dynamics and culture
- Evaluate key hiring plans
4. Deal Terms & Valuation
Common Valuation Methods
- Comparable company analysis
- Discounted cash flow (challenging for early-stage)
- Venture capital method (terminal value ÷ expected return)
- Berkus method (assigning value to key achievement milestones)
- Scorecard method (comparing to average pre-money valuations)
Key Term Sheet Elements
- Pre-money valuation
- Investment amount and equity percentage
- Liquidation preference
- Anti-dilution provisions
- Pro-rata rights
- Information rights
- Board representation
- Vesting schedules
5. Post-Investment Management
- Establish communication cadence (monthly/quarterly updates)
- Define your value-add role (advisory, connections, follow-on)
- Monitor key performance indicators
- Prepare for follow-on investment decisions
- Assist with subsequent fundraising rounds
- Plan for potential exits
Investment Vehicles & Structures
Direct Investment Options
| Structure | Description | Pros | Cons |
|---|---|---|---|
| Common Stock | Same class as founders | Simplicity, aligned interests | Few investor protections |
| Preferred Stock | Senior to common shares | Liquidation preference, protective provisions | More complex, potential misalignment |
| Convertible Note | Debt that converts to equity | Defers valuation, discount on next round | Interest accrual, potential disputes on terms |
| SAFE (Simple Agreement for Future Equity) | Right to future equity | No interest/maturity date, standardized terms | No investor protections until conversion |
Indirect Investment Options
- Angel groups (pooled investments with shared due diligence)
- Angel funds (professionally managed portfolio of startups)
- Syndicates (lead investor with followers)
- Equity crowdfunding platforms (Republic, SeedInvest, etc.)
- Incubator/accelerator-linked funds
Comparative Analysis: Investment Stages
| Factor | Pre-Seed | Seed | Series A |
|---|---|---|---|
| Typical Valuation | $1-3M | $5-15M | $15-30M+ |
| Round Size | $100K-$500K | $1-2M | $8-15M |
| Investor Type | Angels, Friends/Family | Angels, Micro VCs | Venture Capital |
| Risk Level | Extremely High | Very High | High |
| Evidence Required | Team, idea, prototype | Early traction, MVPs | Revenue growth, scaling metrics |
| Typical Equity | 10-20% | 15-25% | 15-30% |
| Primary Use of Funds | MVP development | Product-market fit | Scaling operations |
Common Challenges & Solutions
Challenge: Overvaluation
- Solution:
- Use benchmark data from databases like PitchBook or CB Insights
- Propose tranched investment tied to milestones
- Consider alternative structures (notes, SAFEs) to defer valuation
- Walk away if valuation expectations remain unreasonable
Challenge: Portfolio Management
- Solution:
- Create standardized tracking system for all investments
- Establish clear communication expectations with founders
- Reserve 50-100% of initial investment for follow-on rounds
- Join syndicates to diversify more efficiently
- Use portfolio management tools (Seraf, AngelList, etc.)
Challenge: Due Diligence Limitations
- Solution:
- Join angel groups to share due diligence efforts
- Specialize in sectors where you have expertise
- Create a standardized due diligence checklist
- Engage domain experts for technical assessment
- Follow experienced lead investors with proven track records
Challenge: Exit Planning
- Solution:
- Discuss exit expectations with founders pre-investment
- Understand potential acquirers in the space
- Include tag-along rights in investment agreements
- Maintain relationships with later-stage investors
- Monitor M&A activity in relevant sectors
Angel Investing vs. Other Asset Classes
| Factor | Angel Investing | Public Stocks | Real Estate | Venture Capital Funds |
|---|---|---|---|---|
| Minimum Investment | $5K-$25K | <$100 | $20K-$100K+ | $250K-$1M+ |
| Liquidity | Very Low | High | Medium | Low |
| Expected Returns | 20-30%+ | 7-10% | 8-12% | 15-25% |
| Control | Medium to High | None | Variable | None |
| Time Commitment | High | Low | Medium | Low |
| Diversification | Manual | Easy | Difficult | Automatic |
| Tax Benefits | Potential QSBS exemption | Capital gains | Depreciation | Carried interest |
Best Practices & Practical Tips
Understand Tax Implications
- Qualified Small Business Stock (QSBS) exemption can exclude up to 100% of capital gains
- Track basis adjustments for pass-through entities
- Consider state-specific tax incentives for angel investments
Documentation Management
- Maintain organized records of all investments, including:
- Term sheets and final agreements
- Capitalization tables
- Investment memoranda
- Email correspondence with founders
- Maintain organized records of all investments, including:
Set Clear Expectations
- Define your value proposition beyond capital
- Establish boundaries for your involvement
- Clarify communication frequency and format
- Discuss follow-on investment capacity
Network Effectively
- Join established angel groups in your region
- Attend industry-specific conferences and events
- Build relationships with venture capitalists for follow-on rounds
- Connect with subject matter experts for due diligence assistance
Continuous Learning
- Study post-mortems of failed startups
- Review patterns of successful exits
- Stay current on emerging technologies and business models
- Analyze changing trends in venture funding
Emotional Discipline
- Avoid “fear of missing out” decisions
- Be prepared for total loss of investment in any deal
- Don’t overweight personal affinity for founders
- Maintain patience with long investment horizons (7-10+ years)
Value Addition Beyond Capital
- Leverage industry connections for customer introductions
- Provide operational expertise where relevant
- Assist with recruiting key talent
- Help prepare for subsequent funding rounds
Resources for Further Learning
Books
- “Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups” by David S. Rose
- “Venture Deals” by Brad Feld and Jason Mendelson
- “Angel: How to Invest in Technology Startups” by Jason Calacanis
- “What Every Angel Investor Wants You to Know” by Brian Cohen
Online Resources
- Angel Capital Association
- Y Combinator Startup Library
- Seraf Investor
- AngelList Blog
- Kauffman Foundation Resources
Data Sources
Communities & Networks
By following this comprehensive framework, angel investors can build a disciplined approach to early-stage investing that maximizes potential returns while effectively managing risk. Remember that angel investing is both an art and a science—successful investors combine rigorous analysis with intuition developed through experience.