How to Angel Invest: The Process
October 1, 2018 | By Vela Wood
After you’ve determined whether you’re accredited, discussed angel investing with your investment advisor, created systematic deal flow, and put your expectations in check, it’s finally time to begin the process.
Here is an outline of what that looks like. Once you’ve identified a company or investment opportunity…
Identify a Startup Lawyer
Now will be the best time to receive guidance for your upcoming deal from a lawyer. Investment goals and opportunities vary, so you should ensure that you are approaching your situation intelligently and as informed as possible. As venture capitalist, Sammy Abdullah, says, “You never want to do a deal without a lawyer reviewing the deal for you.”
Due Diligence
Review the company and their financials. As mentioned earlier, the legwork of this step can be handled by other members of your syndicate or angel network. In his book, Angel Investing, David Rose states that spending at least 20 hours on this step has been correlated to higher chances of success for investments. Having your lawyer review company structure, documentation, regulatory matters, employee benefit plans etc. would also be a component you include in your due diligence process.
Term Sheets
The party to deliver the term sheet varies depending largely on leverage and the company’s stage. If you’re joining the round after other investors, you will probably receive a term sheet from the startup. In Series A financings or later, the lead investor will provide the company with a term sheet. However, if the company is in its nascent stages, and perhaps you’re the only investor, you may have the opportunity to deal with the company on your own terms and give them a term sheet. We have seen many cases where investors relied on lawyers without sufficient venture expertise that led them to pursue terms that were off-market and slowed down the investing process in later rounds. Make sure you are enlisting the assistance of skilled legal and financial advisors throughout this process.
Many aspects of investing in startups have been standardized, and you can become familiar with sample term sheets here:
- National Venture Capital Association (more investor friendly)
- Series Seed (more company friendly; removes certain investor protections to facilitate the deal)
- Gust (middle ground between the two above; “founder-friendly and investor-rational”)
Wiring
Make it official. You could reach this point in four weeks.
Exit
When dreaming of your exit event as an investor, you may imagine this. It doesn’t look like that. But it can still be just almost as fun and simple. For example, if the company is acquired, you are sent the money right away. But note, an exit is likely years after your initial investment.
Now, you can take your returns and jump back into the fun world of angel investing (after talking to your investment advisor of course 😉). But seriously, this isn’t investment advice.
Special thanks to Vela Wood law clerk, Ikenna Okoro, for his assistance with this series.