Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups

otherwise promising, I would think twice about investing in it if its founder exhibits one or more of the following characteristics: Perceived lack of integrity (an instant disqualifier) Unrealistic assessment of market size Unrealistic assessment of competitive offerings Unrealistic assessment of competitive advantages Unrealistic assessment of ex

As an investor, you put your money behind the entrepreneur and her company, not behind a specific product or service.

Bill Payne and I both believe the Scorecard Method is the most useful approach to setting a baseline valuation. The Risk Factor Summation Method is good as a supplemental methodology because it considers factors not always included in investor considerations. The other three methods are also valuable, but should be used in combination with the Scor

Businesses designed for sale at a later, sharp valuation increase will be purchased with an eye to their future growth and profitability, rather than their current earnings, or even revenues. They should thus be willing to take bigger risks, accept outside equity and debt capital, and swing for the fences, focusing on growth above all.

When it comes to a full equity round using convertible preferred stock, the majority of U.S.-based venture capital funds historically have used a standard term sheet model developed over a number of years by all of their law firms working together under the coordination of the National Venture Capital Association. This term sheet, known as the NVCA

Most professional angels (that is, people who would self-identify with the term angel investor and are ultimately planning to do ten or more investments) invest in business arenas they already know well. That is why most serious angel groups tend to cluster around particular industries. For example, in New York we have, among others, New York Angel

you will receive $1,000 (because you will receive 10 percent of $10,000). Your Return On Investment (ROI) will therefore be $1,000 ÷ $100, or a 10-times return on your money. We abbreviate this as a 10x return. Because you got this return exactly one year after you invested your money, one can say that the annual rate of return on your investment w

(That said, until you are comfortable with the ins and outs of the angel-funding process, it is imperative that you engage an attorney with experience in early-stage financing. This is not a situation where you want to rely on your family's personal lawyer, or on a local real estate attorney you happen to know. If you hire a skilled professional, t

Once an investment is made, the rough outcomes (averaged from several independent studies of angel returns) are: 50 percent eventually fail completely. 20 percent eventually return the original investment. 20 percent return a profit of 2 to 3 times the investment. 9 percent return a profit of 10 times the investment. 1 percent return a profit of mo

If my convertible note says that it will convert at a 20 percent discount to that $5 million, for example (which, if you do the math, is $4 million), I would seem to have made a very bad deal. Why? Because I end up paying for Company A's stock based on a $4 million valuation, instead of the $1 million it was worth in its early days when I was willi