Angel investing, similar to terms like “hedge fund” or “blockchain”, is a familiar one. It’s referenced in TV shows and newspapers. You nod along when you hear someone discuss angel investing and yet, when asked to elaborate what an angel investor does, you might struggle to explain beyond the high-level “gives people money” answer. Don’t worry. Whether you have aspirations to become an angel investor yourself or just want to know “seriously, what do they do?”, we’ve got you covered.
It’s a high risk, high reward type of investing
“You are giving a founder capital in exchange for owning a percentage of their company,” says Angela Lee, founder of 37 Angels and professor at Columbia Business School. Lee explains more thoroughly with a commonly used example from the angel investing world. “I, as an angel investor, give a founder $50,000 and now I own one percent of their company (based on the valuation in this example, not always). So that means if the company does great and they get sold to Amazon for $50 million, that I walk away with $500,000. If the company does poorly and they fold and it goes to zero, then my $50,000 turns to zero. That is the risk-reward we are taking when we do angel investing.”
Of course, that’s just an example. Not all angel investors invest exactly $50,000 and the valuation isn’t always that $50,000 buys you one percent of a company. (Like what you might see on an episode of Shark Tank, equity will always depend on the company’s valuation as well as a back-and-forth negotiation between the founder and angel investor.) But before you can even start tackling the jargon, you first have to take another step.
You usually need to be an accredited investor
You typically need to become an accredited investor to even be eligible for angel investing deals. In order to become an accredited investor, the Securities and Exchange Commission (SEC) requires that you have earned income of more than $200,000 (or $300,000 together with a spouse) for the last two years or you have a net worth over $1 million—excluding your primary residence. (Note: the accredited investor definition changed on December 8, 2020, to include broader qualifications beyond financial wealth, such as financial literacy. Read more here.) In Lee’s opinion, that bar is too low, especially for those residing in a high cost of living city.
“The data shows that to do angel investing properly, and to be properly diversified, you need to write at least 10 checks and most founders won’t take smaller than a $25,000 check,” says Lee. “That means you need to be prepared to put $250,000 into this asset class and it’s highly speculative. You don’t want angel investing to be a quarter of what you’re investing. It should be five to ten percent of what you’re investing in.”
Even if you are ready, don’t just jump straight into writing 10 checks. Lee recommends you space this process out over several years as you get started.
You’ll need to educate yourself on jargon
Similar to investing in the stock market, angel investing has its own language with terms like “cap table,” “dilution,” “drag-along rights,” and “pro-rata rights”. Part of being an effective investor is learning this language so you can communicate with other investors and founders. The Helm has a helpful investing glossary with everything you need to know about founder-funder dynamics, valuation, and investment terms and conditions.
In addition to learning some of the jargon you’ll hear, Lee recommends you also feel comfortable knowing how to calculate dilution and understand how founders come up with a valuation. Read more about common mistakes that angel investors make here.
Finding quality deals is key
Your first option is to join an angel network, advises Lee. “One of the great things about angel networks is that you get curated deal flows,” she explains. Her angel network, 37 angels, looks at 2,500 companies a year, but only introduces the 50 best to the angels, which means membership buys you quality deal curation.
Similarly, membership to The Helm’s Investor Community provides monthly opportunities to make investments into female-founded companies. Built for both novice and experienced investors who are committed to putting their dollars—small or large—behind the next wave of women-led innovation, The Helm’s membership offers sourced and curated deals that align with your own interests. You choose whether or not you would like to invest and at what amount. (And if you’re new to angel investing, The Helm will provide exclusive funder content on how to begin investing as well as access to a community of like-minded investors.)
The second option is to be a mentor at an accelerator, especially for a sector in which you’re interested in investing. “I love accelerators because they’re a great hub between investors and founders,” says Lee.
Crowdfunding is another route to get your feet wet
Perhaps you’re not yet in the position to be accredited, then Lee advises you explore equity crowdfunding, like iFundWomen, SeedInvest, WeFunder, or Republic, which she describes as basically democratized angel investing. It doesn’t require a large investment and you don’t need to be accredited. It’s not Kickstarter where you’re essentially making a donation and might get a bonus. You’re actually investing in startups.
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Erin Lowry is the author of Broke Millennial and Broke Millennial Takes On Investing. Her third book, Broke Millennial Talks Money, is now available for pre-order. Follow Erin on Instagram at @brokemillenialblog