Frequent Asked Questions

An angel investor (also known as a private investor, seed investor or angel funder) is a high net worth individual that is considered to be an “Accredited Investors” who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Often, angel investors are found among an entrepreneur’s family and friends. The funds that angel investors provide may be a one-time investment to help the business get off the ground or an ongoing injection to support and carry the company through its difficult early stages.

Essentially these individuals both have the finances and desire to provide funding for startups. This is welcomed by cash-hungry startups who find angel investors to be far more appealing than other, more predatory, forms of funding. For the most part, Angel investors are survey and experienced business professionals that understand the risk-reward dynamic in high-risk investments.

Angel investors are normally individuals who have gained “accredited investor” status but this isn’t a prerequisite. The Securities and Exchange Commission (SEC) Reg-D defines an “accredited investor” as one with a net worth of $1M in assets or more (excluding personal residences), or have earned $200k in income for the previous two years, or having a combined income of $300k for married couples.2 Conversely, being an accredited investor is not synonymous with being an angel investor.
or;
Any entity in which all of the equity owners are accredited, investors.
or;
Any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person

This regulation is designed to provide a certain level of a safety net to the investor and to ensure that they will not be taking advantage or be defrauded by unqualified entities that are dealing with and or selling securities to the public.

Venture capital is a form of private equity and a type of financing that investors provide to startups or early-stage companies and small businesses that are believed to have long terms of growth potential. Venture capital generally comes from well-off investors, investment banks, and any other financial institutions. Venture capital, for the most part, is structured as an investment fund that the source of capital comes from private and public capital such as pension funds, retirement accounts, hedge funds, and other long term investments, typically allocated to small companies with exceptional growth potential, or to companies that have grown quickly and appear poised to continue to expand.

Though it can be risky for investors who put up funds, the potential for above-average returns is an attractive payoff. For new companies or ventures that have a limited operating history (under two years), venture capital funding is increasingly becoming a popular – even essential – source for raising capital, especially if they lack access to capital markets, bank loans, or other debt instruments. The main downside is that the investors usually get equity in the company, and, thus, a say in company decisions.

In a venture capital deal, large ownership chunks of a company are created and sold to a few investors through independent  LP or SPV that are established by venture capital firms. Sometimes these partnerships consist of a pool of several similar companies. One important difference between venture capital and other private equity deals, however, is that venture capital tends to focus on emerging companies seeking substantial funds, between $1M-$5M for the first time, much larger than Angel Investors, between $250-$1M while PE firms tend to fund event larger, typically $5M plus into more established companies that are seeking an equity infusion or a chance for company founders to transfer some of their ownership stakes. A typical VC charged the investors what called the 2/20. This means that they receive a 2% management fee of the total capital under management in addition to sharing 20% of the upside performance of the fund after the investors repaid their initial investment. The entry-level into a VC fund is typical $500K and up.

Data that was collected from thousands of active angel investors the common consensus is that venture investing should be in a range of 12-18% of your overall investment portfolio depending on your personal risk – profile. For more aggressive investors, which represent 20% of all investors, they allocate as high as 30% of their capital to Angel and Venture investing.  Public companies, REITs, and ETFs make up the majority of my investments. They provide you with a stable source of income and flexibility because they are dividend-generating, liquid investments. I can buy and sell them whenever I like. As you know, investing in early-stage companies doesn’t provide any current income and the investments are not liquid. It’s extremely difficult to sell these securities.

The answer to the question about should it be more or less is a very personal choice. The way you should look at it is, you have financial responsibilities to your family. Taking a more aggressive approach to angel investors would limit your choices as a family in the near term. You need to see if you are willing to make those sacrifices right now. 15% allocation to angel investing means you will be deeply involved in this asset class and will be able to build a portfolio that is reasonably large at 30+ companies.

After 4 full years based on the above scenario, you will have a portfolio with approximately 12 companies (don’t forget you might have an early failure or acquisition), and you will have invested somewhere in the neighborhood of $200,000 to $250,000. Not coincidentally, We believe this is the minimum amount you should reserve for building an angel investment portfolio. Anything less than that amount and you won’t have invested in enough companies. So if you aren’t comfortable committing $250,000 to angel investing over a 4 year period, you might not want to start.

Let’s examine another scenario. If an angel builds a portfolio closer to your recommended range of 20+ companies where the investment pace is 6 new deals a year, the math works out to something like this. Assuming $25,000 for the initial round and allocating funds for follow-on rounds, an angel will invest over $1,000,000 dollars in a 4 to 5-year time frame. If you keep to the 5% to 10% of your overall investable net worth, such an angel should have an overall investment portfolio of between $10,000,000 and $20,000,000.

For an investor, there’s no greater thrill than getting behind a promising new business early on and helping to make it a success. Today, there are roughly 300,000 Americans who, as angel investors for startups, attempt to do just that.

The amount of active angel investors in the United States continues to grow. The Small Business Administration (SBA) estimates that there are more than 300,000 individual angel investors and growing fast in the United States in 2019, which provides funding for about 30,000 companies per year.

But because we all cannot be a Jeff Bezos, it’s generally wise to team up with an investor group. Even if you make it over the SEC’s regulatory hurdle, having any real success usually means joining a group of other “angels” who can share the due diligence responsibilities as well as the initial seed capital.

Traditional Angel Investor Groups

The good news for early-stage investors is that the number of angel funding groups in the U.S. has exploded over the past couple of decades. According to the Angel Capital Association (ACA), there are now three times as many groups as there were in 1999. In 2019, ACA membership consisted of 275 angel groups, with an estimated 400 total groups in the U.S.

Still, it helps to have personal connections, as most of these groups allow membership by invitation only. That doesn’t mean you’re necessarily out of luck if you don’t have an “in” with any of the current members, however. Some will allow newer angel investors to participate in a couple of meetings as a guest. Once they get a sense of your commitment level and what you bring to the table, they may ask you to join.

Most investor groups require membership fees—typically of around $1,000 or more per year—and hold periodic meetings where they hear pitches from entrepreneurs in need of capital.

Advantages of Angel Groups

Though attending monthly or quarterly meetings might sound like a lot of work, there are some important reasons why the team approach is popular among angel investors. Most young companies are seeking more cash than any single investor is willing to put up—often upward of $1 million. By dividing that ownership stake among several investors, an individual may only need to kick in say $25,000 to $50,000 on a single deal.

Investors who band together can also split the considerable due diligence work that any major investment requires. Beyond being a huge time-saver, a collaborative operation allows the funders to draw on each other’s experience and expertise. The decision to invest in a business is still up to the individual, but in this way, prospective investors get input from others in the group before they decide whether to get involved.

Perhaps the biggest advantage of joining a well-organized group, however, is being able to learn about more deals and more critically have a full stack backroom support with all the necessary resources. Angel investing is by its nature a high-risk high-reward proposition. As such, most experts suggest having a portfolio of at least 10 companies in order to protect your capital. It certainly helps to have access to a steady flow of highly qualified and vetted deals —something that’s hard to achieve if you’re going solo with regard to angel investing.

Online Investing Syndicates

If you like the idea of joining up with other investors but don’t want the commitment of a traditional investing group, you do have an alternative. Online syndicates such as AngelList and others to allow high-net-worth individuals to work together on deals, often with no annual fees and no meetings.

Online groups are also attractive to those who aren’t ready to put up large sums of cash. Some syndicates let you contribute as little as $1,000 to a particular business venture, significantly lowering your exposure to risk. 

Typically, a lead investor will put up a substantial amount of the total investment— often around 20%—and let other syndicate members kick in smaller amounts. To compensate the lead investor for their larger role in the deal, the other investors agree to pay the lead a “carry”—a percentage of the profit from their investment. 

Some syndicates cover a fairly broad range of deals and others specialize in a specific industry, such as technology or healthcare. If you’re interested in connecting with other investors, the ACA website is a good place to start. There, you’ll find a convenient directory of online and traditional groups across the U.S.

The Bottom Line

If you’re new to angel investing, it often helps to join a group that can partner up on deals and spread out the due diligence work. And with online syndicates, you don’t necessarily need to meet face-to-face with other members to get your crack at early-stage investment opportunities.

Value investing in an angel venture fund involves putting money into early-stage companies with the expectation that they will grow significantly over time. Here are some key points about this type of investment:

1. High Potential Returns: Angel investing can offer substantial returns if the startups succeed, as investors get in at an early stage when valuations are low.

2. Diversification: Investing in a fund allows for diversification across multiple startups, which can mitigate risk compared to investing in a single company.

3. Access to Innovation: Angel investors often get access to cutting-edge technologies and innovative business models.

4. Active Involvement: Many angel investors enjoy the opportunity to mentor and guide startups, contributing to their success.

5. Risk Factors: It’s important to note that angel investing is high-risk. Many startups fail, and investors may lose their entire investment.

6. Long-Term Commitment: Returns on angel investments typically take several years to materialize, requiring patience and a long-term perspective.

If you have specific questions about a particular fund or need more detailed information, feel free to ask!

An SPV, or Special Purpose Vehicle, is a legal entity created for a specific, narrow purpose, often to isolate financial risk. SPVs are commonly used in the financial sector to securitize assets, manage risk, or facilitate complex financial transactions. They are structured to be separate from the parent company, which helps protect the parent company from financial risk associated with the SPV’s activities. SPVs can take various forms, such as corporations, partnerships, or trusts, depending on the jurisdiction and the specific needs of the transaction.

The average lifecycle of an angel investment typically ranges from 5 to 7 years. This period can vary depending on several factors, including the industry, the growth rate of the company, and market conditions. During this time, angel investors provide capital to early-stage startups in exchange for equity, with the expectation of a return on investment when the company is acquired, goes public, or reaches a significant valuation milestone.

Angel investments are generally considered to be illiquid. This means that once you invest in a startup or early-stage company, it can be difficult to quickly convert your investment back into cash. Here are a few reasons why:

1. Long-Term Commitment: Angel investments typically require a long-term commitment, often several years, before you might see a return on your investment.

2. Lack of Public Market: Unlike stocks in publicly traded companies, there is no public market for shares in private startups, making it harder to sell your stake.

3. Exit Opportunities: Liquidity events, such as an acquisition or an IPO, are the primary ways to cash out, and these events can take a long time to materialize.

4. Market Conditions: The ability to sell your investment can also depend on market conditions and the specific circumstances of the company.

If you need more specific advice regarding your investment, it might be helpful to consult with a financial advisor who specializes in venture capital or private equity.

Convertible notes and SAFE (Simple Agreement for Future Equity) notes are both instruments used by startups to raise early-stage funding, but they have some key differences:

1. Structure and Complexity:

   • Convertible Note: This is a debt instrument that converts into equity at a later date, typically during a future financing round. It includes an interest rate and a maturity date.

   • SAFE Note: This is not a debt instrument and does not accrue interest or have a maturity date. It is a simpler agreement that converts into equity under certain conditions.

2. Interest and Maturity:

   • Convertible Note: Accrues interest over time and has a maturity date by which it must convert to equity or be repaid.

   • SAFE Note: Does not accrue interest and has no maturity date, making it simpler and more flexible.

3. Conversion Terms:

   • Convertible Note: Converts into equity at a discount to the price per share in the next financing round, often with a valuation cap.

   • SAFE Note: Also converts at a discount or with a valuation cap, but the terms are generally more straightforward and standardized.

4. Investor Risk:

   • Convertible Note: Since it is a debt instrument, investors have a claim on the company’s assets if it fails.

   • SAFE Note: Investors do not have a claim on assets, as it is not a debt instrument.

5. Popularity and Use:

   • Convertible Note: Traditionally more common, but can be more complex due to interest and maturity terms.

   • SAFE Note: Increasingly popular due to its simplicity and ease of use, especially in Silicon Valley.

Both instruments are designed to delay the valuation of a startup until a later stage, allowing for more flexibility in early-stage fundraising.

A Priced Round, also known as an Equity Round, is a type of financing event for startups and companies where investors purchase equity in the company at a set price per share. This process involves determining the company’s valuation, which then dictates the price of the shares being sold.

In a priced round, the company and investors agree on a valuation, and based on this valuation, the price per share is calculated. Investors then buy shares at this price, and in return, they receive equity ownership in the company. This type of funding round is common in venture capital and is typically used in Series A, B, C, and later funding rounds.

The key aspects of a priced round include:

1. Valuation: The company’s worth is assessed to determine the price per share.

2. Equity: Investors receive shares in the company, giving them ownership stakes.

3. Dilution: Existing shareholders’ ownership percentages may decrease as new shares are issued.

Priced rounds are often contrasted with convertible notes or SAFE (Simple Agreement for Future Equity) rounds, where the valuation is not set until a later date.

Angel investing is quite unique compared to other investment asset classes. Here’s a quick comparison:

1. Risk and Return: Angel investing typically involves high risk but also the potential for high returns. Unlike stocks or bonds, where returns can be more predictable, angel investments in startups can result in significant losses or substantial gains.

2. Liquidity: Angel investments are generally illiquid. Once you invest in a startup, your capital is tied up until the company exits, either through an acquisition or an IPO. In contrast, stocks and bonds can be bought and sold on public markets, offering more liquidity.

3. Involvement: Angel investors often take an active role in the companies they invest in, providing mentorship and guidance. This is different from other asset classes like mutual funds or real estate, where investors are typically more passive.

4. Time Horizon: The time horizon for angel investing is usually long-term, often 5-10 years, as it takes time for startups to grow and potentially exit. Other asset classes, like stocks or real estate, can offer both short-term and long-term investment opportunities.

5. Diversification: Angel investing requires a different approach to diversification. Since the risk is high, it’s often recommended to invest in a portfolio of startups rather than putting all your capital into one or two companies. This is similar to diversification strategies in stocks but more critical due to the higher risk involved.

6. Access and Requirements: Angel investing often requires accreditation and a significant amount of capital, making it less accessible to the average investor compared to stocks or mutual funds.

Each asset class has its own characteristics, and the choice depends on an investor’s risk tolerance, investment goals, and involvement preference.

Angel investors can benefit from several tax incentives designed to encourage investment in startups and small businesses. Here are some key tax benefits typically available for angel investors:

1. Capital Gains Tax Relief: In many jurisdictions, angel investors can benefit from reduced capital gains tax rates on profits from the sale of shares in qualifying companies, provided they hold the investment for a minimum period.

2. Tax Credits: Some regions offer tax credits to angel investors, allowing them to deduct a percentage of their investment from their tax liability.

3. Loss Relief: If the investment does not perform well, angel investors may be able to claim loss relief, offsetting the loss against other income to reduce their overall tax bill.

4. Deferred Tax on Gains: In certain cases, investors can defer capital gains tax by reinvesting the proceeds from a sale into another qualifying investment.

5. Exemption from Inheritance Tax: Investments in qualifying companies may be exempt from inheritance tax if held for a specific period.

These benefits can vary significantly depending on the country or region, so it’s important for angel investors to consult with a tax advisor to understand the specific incentives available in their area.

Starting your journey as an angel investor can be exciting and rewarding. Here are a few steps to consider:

1. Educate Yourself: Learn about the basics of angel investing, including the risks and rewards. Books, online courses, and workshops can be valuable resources.

2. Join Angel Networks: Consider joining an angel investor network or group. These networks provide access to deal flow, educational resources, and a community of experienced investors. Examples include AngelList, Tech Coast Angels, and Golden Seeds.

3. Attend Startup Events: Participate in startup pitch events, demo days, and networking events to meet entrepreneurs and other investors.

4. Start Small: Begin with small investments to gain experience and understand the process. Diversify your investments to spread risk.

5. Leverage Online Platforms: Use online platforms like SeedInvest, Crowdcube, or Republic to find investment opportunities and connect with startups.

6. Seek Mentorship: Connect with experienced angel investors who can provide guidance and insights.

7. Understand Legal and Financial Aspects: Familiarize yourself with the legal and financial aspects of angel investing, including term sheets, valuations, and exit strategies.

By taking these steps, you’ll be well-prepared to start your journey as an angel investor.

To effectively vet your membership in an angel group, you should consider several key factors to ensure the group aligns with your investment goals and values. Here are some steps you can take:

1. Research the Group’s Reputation: Look into the group’s history, track record, and reputation in the investment community. Check for any reviews or testimonials from current or past members.

2. Understand the Investment Focus: Make sure the group’s investment focus aligns with your interests, whether it’s in specific industries, stages of startups, or geographic locations.

3. Evaluate the Membership Criteria: Review the criteria for membership to ensure you meet the qualifications and that the group attracts members with similar investment philosophies.

4. Assess the Deal Flow: Consider the quality and quantity of investment opportunities the group provides. A strong deal flow is crucial for finding promising startups.

5. Review the Due Diligence Process: Understand how the group conducts due diligence on potential investments. A thorough process can help mitigate risks.

6. Consider the Networking Opportunities: Evaluate the networking and learning opportunities the group offers, such as meetings, workshops, and events.

7. Check the Fees and Costs: Be aware of any membership fees or costs associated with being part of the group and ensure they are reasonable.

8. Speak with Current Members: If possible, talk to current members to get their insights and experiences with the group.

By carefully considering these factors, you can make an informed decision about whether the angel group is the right fit for you.