Is Angel Investing For You?
If you qualify to be an accredited investor (more than $1 million in net worth, excluding your home equity, or you make $200,000 per year if single or $300,000 per year if married), you may want to consider angel investing. Angel investors make investments in early stage startup companies. These companies may still be developing their product / service and are in very early stages of raising money. In exchange for making these early investments, you will be able to purchase shares of the company at hopefully a very low valuation compared to what the company may some day be worth. While very risky, since many startups fail, angel investing provides an opportunity for significant returns if the company is successful and its value grows over time.
There are many sites where you can connect with early stage companies. Here are a few that I have come across:
Like most other types of investments, it makes sense to keep your investments small (like many companies do as outlined in the book "Little Bets"), and diversified across a range of companies. It also makes sense to invest in companies and industries you know something about. Maybe you are a doctor or a dentist and you know about medical devices and products that you use every day. That might be a great area for you to invest in a startup company that could be bringing new technology or products to your industry.
I recommend keeping your initial investment small. See how the Company does and then consider participating in subsequent rounds of financing if you feel like the Company's prospects are continuing to improve. You may be exposed to a dizzying array of financial terms, including common stock, convertible preferred stock, convertible notes, warrants, etc. Always consult with your financial or tax adviser to make sure you understand the implications of your investment and the nuances of each type of security. Ultimately, what you are buying is an ownership stake in the company and you need to look at the company's value on a "fully diluted" basis, assuming all of the convertible instruments are converted into common stock. What is the implied valuation of the company on a fully diluted basis? Does that make sense given how it has operated in the past, the business plan and its future prospects? How does that valuation compare to competitors in the industry that are more mature in their business? Are you comfortable buying into that valuation? Is the management team capable of execution and transparent - can you trust them? These are the types of questions you need to ask before making an angel investment. As an early stage investor, you should have access to first hand information about how the company is doing in executing its business plan. You should demand transparency from the management team if you are going to be an angel investor, as this will help protect your investment. You always have the option of keeping your initial investment the same as later rounds of financing occur, but that will result in dilution of your ownership interest. This isn't necessarily a bad thing if you are risk averse. It can help reduce your losses if the company fails and if the company is successful, you will still own a (smaller) piece of the pie. Ultimately, the company if successful will have many options including going public, being bought out, or continuing to operate and pay out cash flow to investors. Regardless, if the Company is successful, you have the potential for superior returns by being involved at an early stage.
If you're interested in learning more about angel investing, David Rose the founder of Gust has a book called Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups. You might also be interested in Angel: How to Invest in Technology Startups--Timeless Advice from an Angel Investor Who Turned $100,000 into $100,000,000 by Jason Calacanis.
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