Angel Investing: 20 Things Entrepreneurs Should Know

Angel investors invest in early stage or start-up companies in exchange for an equity ownership interest. Angel investing in start-ups has been accelerating. High-profile success stories like Uber, WhatsApp, Facebook, and others have spurred angel investors to make multiple bets with the hopes of getting outsized returns. Here are my thoughts on frequently asked questions from entrepreneurs about angel financing.

1. How much do angel investors invest in a company?

The typical angel investment is $25,000 to $100,000 a company, but can go higher.

2. What are the six most important things for angel investors?

Here is what angels particularly care about:

The quality, passion, commitment, and integrity of the founders.
The market opportunity being addressed and the potential for the company to become very big.
A clearly thought out business plan, and any early evidence of obtaining traction toward the plan.
Interesting technology or intellectual property.
An appropriate valuation with reasonable terms.
The viability of raising additional rounds of financing if progress is made.

3. What do angel investors like to initially see from an entrepreneur?

A clearly articulated elevator pitch for the business.
An executive summary or pitch deck.
A prototype or working model of the proposed product or service (or at least renditions).
Early adopters or customers.

4. How long will it take to raise angel financing?

It’s my rule of thumb that it will always take longer to raise angel financing than you expect, and it will be more difficult than you had hoped. Not only do you have to find the right investors who are interested in your sector, but you have to go through meetings, due diligence, negotiations on terms, and more. Raising capital can be a very time-consuming process.

5. What financial questions should the entrepreneur anticipate from angel investors?

How much capital are you raising?
How long will that capital last?
What will be your monthly burn rate?
Do you have detailed financial projections for the next two years?
What are the key assumptions underlying your projections?
What key cost components are there for the product or service?
What are the unit economics?
What are the likely gross margins?

6. What questions should the entrepreneur anticipate about marketing and customer acquisition?

The angel investor will want to get a sense of how the company plans to market itself, the cost of acquiring a customer, and the long-term value of a customer. So the entrepreneur should be prepared for the following:

How does the company market or plan to market its products or services?
What is the company’s PR strategy?
What is the company’s social media strategy?
What is the cost of a customer acquisition?
What is the projected lifetime value of a customer?
What advertising will you be doing?
What is the typical sales cycle between initial customer contact and closing of a sale?

7. What questions should the entrepreneur expect concerning the management team and founders?

Who are the founders and key team members?
What relevant domain experience does the team have?
What key additions to the team are needed in the short term?
Why is the team uniquely capable to execute the company’s business plan?
How many employees do you have?
What motivates the founders?
How do you plan to scale the team in the next 12 months?

8. How risky is angel investing?

It’s very risky, and an angel will only invest if he or she is comfortable with potentially losing all of his or her investment. At best, only one in ten startups are successful.

9. How can you find angel investors?

There are a variety of ways to find angel investors, including through:

Entrepreneurs
Lawyers and accountants
AngelList
Angel investor networks (groups that aggregate individual investors)
Venture capitalists and investment bankers
Crowdfunding sites like Kickstarter and Indiegogo

The best way to find an angel investor is a solid introduction from a colleague or friend of an angel. The use of LinkedIn to ascertain connections can prove useful.

10. Will angel investors sign nondisclosure agreements?

No. Angel investors see too many deals and you don’t want to impose a roadblock to getting an investor interested in your company. The entrepreneur will have to be careful and not disclose highly confidential information.

11. What questions should a CEO ask of potential angel investors?

The entrepreneur should determine whether a prospective angel investor will be a good fit for them. Here are questions often asked:

Can you refer me to other entrepreneurs you have worked with?
How do you like to help your portfolio companies?
What amount of follow-on investment do you think our company will need to succeed?
What are your relationships with venture capitalists who would fund our next round?
How do you think you can be helpful to us in growing the business?
How do you like to interact with your portfolio companies?
What are your other investments in our space?

12. What are typical terms for convertible note seed financings?

Angels will often invest in the company through a convertible note. They key terms negotiated are:

Unsecured or secured on the assets of the company – this is almost always unsecured.
Interest rate and payment – the interest is usually accrued and not paid currently.
Discount rate – this is the discount rate the investors enjoy for taking the early risk in the company, expressed as a discount from the company’s Series A round of financing. A discount rate of 20 percent is typical.
Valuation cap – this is the maximum valuation of the company where the note can be converted in the next round of financing. For example, the valuation cap could be set at $10 million, so that if the next round valuation is set at $15 million, the seed investor only converts at the lower $10 million valuation. This rewards the early investor for taking the earlier stage risks. Some notes are uncapped, but most early stage investors strongly resist this.

13. What are the key factors in determining the appropriate valuation in a seed round of financing?

Ultimately, valuation is determined by negotiations, but the key factors will include:

Experience and past success of the team
Market conditions
Competitive environment
Market opportunity
Amount to be invested and resulting dilution to the founders
The value add expected to be brought by the investor
Market comparables
Potential for a big exit

14. What should an email introduction to an angel investor contain from an entrepreneur?

I get tons of emails from start-ups, asking if I will consider investing in their company. Here are the key elements that will get my attention:

Tell me how you got to me – was it ideally a referral from one of my trusted colleagues or friends?
Give me some short bullet points within the email about what your company does, what problem it’s addressing, and any early traction it’s getting.
Tell me something that shows the founders to be competent, experienced, and passionate.
Attach a 2- to 3-page executive summary or 15-page PowerPoint deck.

15. How often should an entrepreneur give updates to his or her angel investors?

It’s best to give monthly updates to your angel investors, whether you have good or bad news. If you are having issues, this can be a way to seek help or advice. And if you need extra investment, this might facilitate a discussion. No one likes to be surprised, so regular communication is important. Jason Calacanis, a noted angel investor, has said, “There is another really awesome reason to keep investors updated: they didn’t give you all their money — they have more!!! They want to give you more!!! If you keep your investors engaged with honest updates, they will reward you by participating in future rounds.”

16. What are typical reasons angel investors will reject an investment?

There are many reasons an angel investor will reject your pitch. In fact, the great majority of prospective investors are likely to reject you. Here are some of the typical reasons for rejection:

The market opportunity or potential size of the business is perceived as too small.
The founders don’t come across as knowledgeable or passionate.
The sector that the start-up operates in is not of interest to the investor.
The pitch was made by the entrepreneur through a blind email and not a referral from a trusted colleague of the angel investor.
The financial projections were not believable and the founders couldn’t convince the investor of the reasonableness of the underlying assumptions.
The company was based too far away from the angel investor (most angel investors like to invest locally, and in tech-oriented cities like San Francisco or New York).
The investor wasn’t convinced of the need for your product or service.
The investor was not convinced that your company was going to differentiate itself from competitors.

17. What legal documents will the angel investors expect to review for a company prior to investing?

The investors will expect these documents prepared by experienced counsel to already be in place:

Charter document (Certificate or Articles of Incorporation)
Bylaws
Organizational Board Resolutions
Confidentiality and Invention Assignment Agreements for all employees and contractors
Organizational Board resolutions
Tax ID number
Federal and state securities law filings for any previously issued stock or options
Stock option plan for employees and directors
Indemnification Agreement for directors
Stock Ledger and Capitalization Table
Stock Vesting Agreements with founders

For the angel round of financing, the following legal documents will likely be necessary:

Board and stockholder resolutions approving the financing
Securities law filings
Subscription Agreement
Convertible note agreement, unless stock is being issued
Amendment to the charter documents, if necessary

18. What mistakes are made by entrepreneurs in a pitch meeting with angel investors?

Not showing me why the market opportunity is key
Bringing your team to the pitch meeting, but only having the CEO speak
Telling me you don’t have any competition
Showing me uninteresting or unrealistic projections
Taking too long in your presentation
Not doing a demo
Not being able to explain the key assumptions in your projections
Not being able to articulate why your product or technology is differentiated from a competitor
Not being able to tell me how you will use my investment capital and how long it will last
Not knowing your potential customers and what they are thinking

See 28 Mistakes Entrepreneurs Make When Pitching to Investors.

19. What benefits can an entrepreneur get by taking on an angel investor?

Other than money, some or all of these benefits are obtainable from good angel investors:

Contacts to venture capitalists
Contacts to strategic partners
Advice and counsel
Credibility by being associated with the investor
Contacts to potential customers
Contacts to potential employees
Contacts with lawyers, banks, accountants, and investment bankers
Knowledge of the marketplace and strategies of similar companies

20. What should an entrepreneur do to prepare for a pitch meeting with an angel investor?

Here are some key things an entrepreneur should do in preparation for a pitch meeting:

Review the investor’s LinkedIn profile and website.
See if you have any common connections on LinkedIn and ask those connections for insight or advice.
Practice your pitch in front of an audience that will give you honest feedback.
Review what portfolio companies the investor has invested in.
Be prepared to be interrupted.
Be prepared to answer difficult questions like “What do you think is the appropriate pre-money valuation for your company?”
Revise and refine your PowerPoint deck. Keep it under 20 slides. Review other company decks for guidance.

Entrepreneurs can be optimistic about raising financing from angel investors, as highly publicized success stories are encouraging more angel investors to commit capital to start-ups.

Richard Harroch is a Managing Director and Global Head of M&A atVantagePoint Capital Partners, a large venture capital fund in the San Francisco area. His focus is on investing in Internet and Digital Media companies. He is the author of several books on startups and entrepreneurship. He was also the founder of several Internet companies. He is the co-author of Poker for Dummiesand a Wall Street Journal bestselling book on small businesses. He was also a corporate partner at the law firm of Orrick, Herrington & Sutcliffe, with experience in startups, mergers and acquisitions, strategic alliances, and venture capital.

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