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How to Be an Angel Investor (paulgraham.com)
122 points by sama on March 7, 2009 | hide | past | favorite | 54 comments

I recommend founders read this too. It would be useful to them to imagine how things look from the investors' side. I'm surprised more didn't take advantage of the Justin.tv stream to spy on the investors at AngelConf. They were pretty candid about how they think.

I had heard a bunch of this before in random threads, but it was very interesting to read it all bundled together. It definitely deserves a few readings...

Thank you!

I was looking through the legal documents just to get a sense of what technically happens when a corporation issues a new type of stock. Thanks for sharing these documents.

Not sure if this is relevant, but http://ycombinator.com/seriesaa/aa-boardconsent.doc has a typo... there is no section 1.iii .. it skips to 1.iiii and then 1.iv.

You mean section 1.iii is misspelled as 1.iiii

Yes, exactly.

Yeah, I stopped watching after 1.ii hoping that maybe someone else would upload the complete set of videos in a more organized manner.

This is just good advice. Period.

You aren't doing your job unless you understand (to some extent) the goal and thought processes of the people and organizations you work and partner with.

I thought this was an interesting claim:

> Angels are the limiting reagent in startup formation.

I'd like to claim that I would have started startups even if YC didn't accept Xobni for the summer of 2006 class. I had already failed at a half-startup. I was doing consulting for another startup called Siteadvisor. Etc.

Yet YC was the catalyst for dropping out of grad school.

Paul certainly gets a unique view into startup creation. I just wonder what the second and third order terms are of this equation.

There probably aren't more than a couple hundred serious angels in the whole Valley, and yet they're probably the single most important ingredient in making the Valley what it is. Angels are the limiting reagent in startup formation.

If there are only a couple hundred serious angels in the Valley, then by deciding to become one you could single-handedly make the pipeline for startups in Silicon Valley significantly wider. That is kind of mind-blowing.

Wow. Mind blowing, but a great insight. I'm really amazed at how few Angels there are, and what a huge disproportionate influence they have on the world economy.

Personally, I think that angel investing would be an absolute blast. Just got to get that, "rich" bit figured out so I can start doing angel investing. :)

The best part about this - Paul calls out the lawyers you should use. Thank you, thank you, thank you a thousand times for this. (We got standard corporate attorneys - I've spent almost $60,000 on legal expenses between incorporation, option plan, and IP protection. Probably could have done it all for under $20K with the right attorney from the get-go.)

I would love to see a sample convertible debt document in addition to the Series AA documents.

$60k on incorporation, option plan, and IP?

You know more about this stuff than I do, but that sounds crazy high. Is the breakdown like, 10%/80%/10%? The one of these that I can see spending money on is the option plan.

10/10/40. I got bad advice. Everything's overbuilt because our guy, even though he's a member of the IVCA, didn't have standard docs.

If $24k for IP is bad advice, what do you think the right number would have been?

Yokum (one of the absolute best out there) quotes $5K as a barebones starter package. I'm sure he'd have helped us avoid overbuilding on the IP in addition to the overbuilding on the corporate stuff.


I refuse to believe you could get half as good as Yokum for twice the price.

He wouldn't remember it, but Yokum spent a good chunk of time on the phone with me and my cofounders when we started Matasano, as a favor for a mutual friend. I totally agree with you.

Having said that, I guess I was weaseling my way around to the point that a boilerplate IP agreement would cost next to nothing, and would probably be all you'd ever need. People obsess too much about IP, and not enough about their own execution risk.

Of course I remember you and Dave. We should separately catch up. Wondering what you did with the LLC and the other "founders."

(I know it's uncool to say here, but we're applying for a patent on our transaction engine. Even in the patent process, we probably could have saved some cash.)

Uncool isn't the word I'd use. I've got patent applications from 7+ years ago, with reputable IP lawyers working for going concerns, that are still "pending". My snipe at you might be "pointlessness". ;)

(but I can see why you spent so much money on IP now; patents are expensive).

Chicago investors kept telling me they would only invest in a company with "protectable IP." Coming from a healthcare VC background, I didn't question it. That was a mistake.

It is what it is at this point - so much money sunk into it that I want to finish it off.

The alternative approach to this is trade secrets law --- we've advised trading firms (for instance) that go through some formality to demonstrate controls on trade secret information for exactly this reason. But you'd probably have been screwed on lawyers either way.

Best of luck with the project.

Thank you for the kind words. Made my day.

He's saying 10k for inc., 10k for options, 40k for IP

Just to try & help clarify

(you probably shouldn't try angel investing unless you think of yourself as rich)

I think there is some legal definition of "rich" below which companies can't raise capital from individuals without issuing registered stock. Something like an individual must have at least $1m in assets or income of at least $200k/year I think.

You're thinking of the SEC "accredited investor" rule:


I'm not an investor and have only moderate experience with funding, but I've brought this up in lots of HN threads about investing and haven't seen it shot down; I was also involved in a negotiation debacle that doubled the value of some options I held in a company that sold to another private company (I had left, had non-expiring options, and would thus have been a non-qualified outside investor had I exercised them, or some-such).

The rule is basically: $1MM net, or $200k ($300k with your spouse) income for the last 2 years.

Even corporations need to be accredited to buy, so you can't just start a consultancy and invest your profits into angel syndicates, unless the principals are themselves accredited or the business has a such a huge amount of net assets that the principals would certainly be accredited anyways.

Again, I feel weird every time I bring this up, because what do I know? But this appears to be the rule.

Yeah, it's the rule, and it's relevant but not in the obvious way (like: you wake up at night and the SEC has kicked down your door and shot your dog b/c you're not an accredited investor but have investments that they think you need to be in order to make).

The origins of the rule were partially in reaction to various scams that were not uncommon pre-great-depression: people would go around selling shares ("music-man" style) in companies that didn't exist, or were otherwise fraudulent, etc., to unsuspecting dupes (of which there were plenty, as is always the case).

Thus the effect of the rule is mostly on the issuer of securities: the point was mostly to deter scammers, but not really to punish their victims. Currently, there are many categories of investment that either are 100% closed off to non-accredited investors or that "theoretically" are not closed off but are "practically" closed off (eg b/c the additional regulatory overhead and legal uncertainty and "bad juju" induced by having non-accredited investors as shareholders means no one sensible would willingly allow non-accredited investors to invest).

Hence your experience: it's not "illegal" for you to be a non-accredited investor in a private company, but unless all the i's are dotted and t's crossed the private company might be in a bad way wrt regulation on account of having you as an investor (inadequate documentation of your informed consent, or failure to keep enough bookkeeping, etc.). Moreover, even if they were doing everything 100% correct wrt you the presence of your investment might scare off other parties (eg during due diligence for a round of funding).

As a regulatory rule it's accomplished it's ostensible purpose -- the # of outright-fraudulent investment schemes is nothing like it was in the 20s, and the direct impact of the remaining schemes is mainly felt by those that mostly can afford the loss and ought to have known better (eg: Madoff's or Stanford's clients).

One thing I'd like to see is some kind of relaxation in the accredited-investor regulations that'd make it easier for the smaller investor to make direct investments in private companies. This needn't be difficult to implement, as all it might take is eg a standardized waiver process that records: the terms of the investment, the investor's consent to the agreement, and lots of identifying information on the issuer (firm and specific individual making the offering); if necessary, restrict the sophistication of the allowed instruments (eg: direct equity purchase, simple options, and so on are ok; anything more complicated not ok for the "standard waiver").

Sadly I've not seen much mention of "proposals" like the above, but something like that would (I think) really open a lot of productive opportunities for a lot of people.

Edit: this section is interesting reading:


It's an informal discussion of various ways to sell securities in a private company. The interesting parts are:

(1) the motivations behind the exemptions (eg: the intrastate rule; given the point was (originally) to keep traveling hucksters from defrauding suckers, the impetus for an exemption for a "local" business makes sense)

(2) even in this informal summary note just how easy it is to fall out of grace wrt these "exemptions" (ie: if someone is supposed to buy "not for resale" then resells, you personally might have a breach of contract with that person but you might also now start worrying about being in breach of regulations)

This is correct.

How much does an angel invest? ... The upper bound is obviously the total amount the founders want to raise.

Obviously this is an upper bound; but it isn't necessarily the upper bound. I'm sure there are instances where the limiting factor is how deep the angel's pockets are.

as a "private amateur" angel investor, i put ~$300K into 13 deals over a period of 4 years ('04-'84(, at a median size of around $20K. my largest investment was $100K; my smallest was $5K. most of them were at valuations south of $3M (in a few cases i did A rounds north of $5M pre, however in both cases i was working or consulting with the company). so far it looks like 3 of the 13 will do >5x, another 2-3 are likely going to return 0, and the other 5-6 are still tbd. i'm hopefuly i'll end up with 3-5 wins, and an aggregate return of 4-5x over a period of perhaps 7 years.

as a "professional" angel investor now for a VC fund, i typically invest $50-$250K at valuations between $1-3M pre-money (however i'm new on the professional side; only done 4 deals since December). too early to say on either wins or returns, but i'm happy with the deals i've done so far.

i think most private angel investors (in Silicon Valley) who dabble do deals at between $10K-25K. most professional angel investors in Silicon Valley who do it as their primary profession invest between $25K-250K per deal.

your mileage may vary.

some angels may do deals as high as $500K - $2M, however those are select cases. most times there are multiple angels syndicating.

sorry that should be "over a period of 4 years ('04-'08)"

FYI, in the first 2 hours you can edit your posts via the direct link to make corrections like that. (And thanks for the great specifics in the grandparent post.)

I'm not sure you'd be doing the startup a favor by throwing a lot of money at it in early stages. It might actually be better (for the startup, maybe not for the investor) to invest 80% of the amount the founders want to raise, just to force them to stay resourceful and frugal

Paul - you're the man, thanks and gratitude from me and lots of people for another essay. Learned some good stuff this time.

Also, did you write this one either Etherpad? I took a lot from watching you write your last piece in Etherpad, so if that's available that'd be very cool. Cheers.

Not this one, unfortunately. I blew out the first draft the night before the conference after getting 4 hours sleep the night before that, and I just opened up vi and started typing. It's a good thing this was one I could write in my sleep, because I practically did.

There are some others I wrote on Etherpad though, which we'll be able to see animated versions of once they release playback.

Good essay - and I also liked the video (posted earlier) that it was based on. Tiny pedantic point; there's one too many 'should's here: "Similarly, founders should also should not get hung up on deal terms" Either 'Similarly, founders should also not...' or 'Similarly, founders also should not...' Didn't want to detract from the message of the piece, but thought it worth pointing out in case it helps.

Thanks, fixed.

I have a potentially silly question: When you buy stock in a public company you have specific protection from liability -- the worst that can happen is you lose your investment. As an angel investor the worst case is worse, in theory. If the company racks up huge debt (maybe by getting sued) then you as a part owner could be on the hook for that. Is that worth worrying about in practice?

Very Nice Work - and thnks for the contribution of docs.

Having read this from a founder point of view its clear to me that neither one side or the other of the transaction has all of the answers. Kind of back to the difference in meaning of "being offered terms", "being given terms" or (my favorite) "coming to terms"

I'll echo the request for a convertable debt document template

Perhaps the single most pragmatic and understandable description of angel investing I've read to date. I am courting angel investors currently and have only run into a small handful who meet the criteria you describe.

Thank you so much for writing this.

Ted Ray, Founder & CEO, Ted's Tinctures Inc. http://jetlagformula.com

Good luck with the fundraising!

I'm curious about your product though. I find it hard to believe that your formula is more effective than 1-3mg of melatonin when the time comes to sleep.

Is it the particular combination of ingredients that is so effective? It doesn't seem like any of the individual ingredients would have much of an impact. It doesn't mean you don't have a business model though, you have very nice packaging and there is currently no package on the shelves that treat jetlag.

It would complicate dosing instructions, but would not bundling your product with 1mg of melatonin to take when it comes to sleep dramatically improve effectiveness?

Edit: After reading the testimonials on your site, it seems that you are not trying to (supplement) sleep cycle issues, but are dealing with the fatigue and haziness one feels after flying for 18 hours. I would believe your product helps with that.

Several good hacks from the writing: 1) Be relentless resourceful. 2) Lower your risk to be decisive. 3) Be good.

This essay and the associated talk happen to form a great object lesson in writing: record some people talking and transcribe it yourself. You learn complexities of human speech, proper use of punctuation, when to break the rules, how unbelievably much people talk, all sorts of good things.

I just finished typing out a transcript of the video on justin.tv. If your interested, check it out at http://tinyurl.com/d8tpzd

Thank you for posting this. Is there a way I can view the Justin.Tv stream again? Youtube?

Also, do angel investors ever go looking for deals, or is this a sign of a bad angel investor?

Is there a way I can view the Justin.Tv stream again?

It all gets archived:


The opposite of "hapless" is probably "lots of gumption".

well worded, well drafted article. I am currently a founder of a company which took its first angel/seed investment from 5 investors, I could feel every word thats beens said. If I ever make big - or "rich" as you say, I'll be looking to contribute my small %age to the angel investing... Thanks Gunjan

VC-s cut both ways: see Eric Brewer for the good and Ferguson (S.C.H. High Stakes, No Prisoners) for the ugly.

Thanks for this, it really cleared up a lot of questions I had after watching the livecast of the conference.

"Good people find good markets."

Such an important point, and one with few resources for learning about.

You just rocked my world with this blog. Thanks!

Rachael Qualls Founder and CEO Angel Capital Group

Brilliant post. Lots of great information from a rarely seen point of view.

Great article.

thank you.

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