Newer investors who can’t claim several confirmed startup investments or fund partnerships already may be capped at $25K per investment (and $150K in total).
Startup Investing Guide
Defining Startup Investing
Startups are early-stage companies that need funds in order to be able to serve their markets and to grow. These companies are usually willing to exchange a stake of their equity capital in order to access the necessary investment capital. Startups are usually innovation-driven businesses targeting sectors with exceptional growth potentials.
Startups Investors
For many decades investing in startups was an exclusive privilege of Venture Capitalists. Nowadays, crowdfunding offers everyone the chance to invest in promising startups with as low as a few thousand US dollars. Early-stage startup investors are usually called Angel investors.
Accredited investors / Non- Accredited investors
This is a classification according to the US legislation. Accredited investors in the US must be able to meet certain levels of wealth as defined by the SEC (?). For example, an accredited investor is holding 1 Million USD in assets (excluding the main residence) or he is earning an annual income of more than 200,000 USD. Accredited Investors gain access to top Deals on many crowdfunding platforms. Non-US investors can enjoy similar privileges when investing in startups as long as their country of residence permits it. Of course, note that it is always up to the discretion of the entrepreneur to allow/disallow any investor taking a stake in their company.
Forms of Startup Investment
Startup investment can take many different forms:
(1) Equity
Equity as in the case of stock provides a stake of ownership in a startup. These shares may be Common or Preferred Shares (the difference between those two mainly concerns liquidation preferences)
(2) Convertible Notes
Convertible notes are actually loans that pay annual interest to investors but with the addition that at a predetermined time in the future provides the option to be converted into equity.
Example: A startup pays a 5-8% annual interest to convertible notes holders. After 2 years, the holders of the convertible notes have the option to convert their notes into equity at a specific price. The price of converting will be usually formed according to a future valuation minus a discount (for example 10-30% discount).
(3) Safe Notes (Equity priced rounds)
Safe Notes are almost the same as Convertible Notes except the fact that they don’t pay annual interest. Safe Note holders will be provided with the option to buy equity at the next Equity Round (when it occurs). Safe notes will be converted into equity like Convertible Notes but they will be converted in better terms than Convertible Notes.
How can Startup Investors Make Money?
Investing in startups is not the same as investing in shares, bonds, and currencies. Investing in startups is not a liquid market, and angel-investors usually must wait for at least 2 years in order to be able to capitalize on their stakes. Startups create value on behalf of their shareholders in the same way as every other company does. Over time, startups create value by expanding their customer base, achieving high growth, generating positive cash-flows, creating net profits, and distributing high dividends.
Here are some events that may trigger payouts on behalf of startup investors:
Events Triggering Startup Investor Payouts
(a) The startup closes successfully a qualifying round. A qualifying round of financing may allow investors to achieve early payouts.
(b) The startup commence paying dividends to its shareholders.
(c) New investors are willing to buy out the stakes of Angel-Investors at an agreed buyout price.
(d) The whole startup gets acquired by a larger company.
(e) The startup goes for an IPO (initial public offering).
|
EVENT |
LIKEHOOD |
GROWTH |
|
(a) Closing a Qualifying round |
High |
Low / Medium |
|
(b) Paying Dividends |
Medium |
Low |
|
(c) New Investors Buyout |
Medium |
High |
|
(d) the Whole startup is acquired |
Low |
Very-High |
|
(e) IPO (initial public offering) |
Low |
Very-High |
Note: Startup investing is a long-term practice and usually needs 2-6 years in order to lead to high growth as seen in the (d) and (e) cases
Minimizing Risk When Investing in Startups
Even the most promising startup investments can lead to a complete failure and even to the loss of the entire investment capital. Therefore startup investors must be prepared for every scenario and manage their portfolio with extreme caution. The main tool of minimizing risk when investing in startups is portfolio diversification, here are some tips:
(1) Invest no more than 2-10% of your total portfolio value in an individual startup
(2) Invest in startups operating in different sectors/industries, not in the same business
(3) Invest in startups located in different countries
(4) Don’t invest in startups capital that you may need in the following 2-6 years
And some broader tips..
(5) Invest in companies managed by experienced teams with a proven record (check also how many full-time human resources are already involved in a startup)
(6) Prefer to invest in startups that already have an established customer base and that are already able to create positive cash-inflows. Many ideas seem great but they will not be able to be transformed into cash-inflows
(7) Evaluate the likelihood of a future acquisition by a larger company or the likelihood for an IPO
(8) Examine the future growth potential of the industry, the competitive advantage of the startup in that industry, and the barriers to Entry/Exit of the business sector
(9) Investigate who else is investing in that particular startup (empirical investigation)
(10) Check any legal issues emerging after the documentation you will be required to sign (best along with your lawyer)
◘ Startup Investing Guide
Crowdholder (c) All Rights Reserved
ANGELLIST REVIEW
◙ ANGELLIST REVIEW SUMMARY
√ Raising Funds for Startups
√ Startups don’t pay for syndicate investments
√ Investors pay 0-25% deal carry to the syndicate lead, and 5% deal carry to AngelList
√ Invest in 100 Startups with one Investment
◙ SUPPORTED PROJECTS
Project Categories:
The are tens of startup categories. Most popular categories include IT Startups, Consumer Electronics, Media, Healthcare, Education and Finance.
Public Fundraising
Adding your startup or funding round to AngelList doesn't affect whether you are raising publicly or privately. Fundraising activity on AngelList is only visible to logged in, accredited investors. If you announce your raise publicly (for example, by social media or to your company's newsletter), you will need to collect evidence from all investors to verify their accredited investor status.
Accredited investors
An individual in the U.S. is said to be accredited if he has $200k or more in income for the past 2 years (or $300k with a spouse), with the expectation of similar earnings this year; or $1m in net assets (assets minus debts).
How are the investors on AngelList verified
All the investors have stated that they are accredited. You should verify that every investor you raise money from is accredited, whether or not you use AngelList. And you should treat each investor you meet on AngelList as if you just met them on the street.
Limits on AngelList investor account
◙ SUPPORTED COUNTRIES FOR SYNDICATED STARTUPS
These are the terms for US and Non-US startups.
--How can a Startup be syndicated on AngelList
(1) First, you must have a syndicate lead
(2) You must also be a US S corporation, C corporation or LLC corporation
(3) UK corporations also qualify
--Non-US companies can raise money publicly
Non-U.S. startups can take advantage of public fundraising, as long as they comply with their local regulations and US regulations
◙ WHO IS ANGELLIST
AngelList is a platform helping startups raising money online. It was found in Jan 2010 by Babak Nivi and Naval Ravikant.
The Service is operated and provided by AngelList LLC based in the US, 16 Maiden Lane, San Francisco CA 94108.
Angellist has made more than 7,500 introductions {between 800 start-ups and 1,200 investors}.
◙ ANGELLIST COST OF SERVICES
Startups don’t pay for syndicate investments.
Investors pay 0-25% deal carry to the syndicate lead, and 5% deal carry to AngelList.
Investors also pay the out-of-pocket costs for each investment—currently $8K in the US and £8,300 in the UK. These costs are paid to third parties such as state regulatory agencies, payment processors and accountants—AngelList does not profit from these fees.
The lead and AngelList do not receive carry until the syndicate investors’ investments and out-of-pocket costs are returned.
◙ ANGELIST TRENDING PROJECTS
How AngelList Trending Work
Trending is based on indications of interest from candidates and investors. In other words, when a lot of high-quality candidates or investors say they want to meet the startup, in a short period of time, this startup trends. The “quality” of the person that is indicating interest matters. Quality is measured by track record—the valuation of the startups a person has invested in, founded, worked at, etc.
◙ ANGELIST SYNDICATES -HOW IT WORKS?
A syndicate allows investors to participate in a lead investor's deals. In exchange, investors pay the lead carry. Investors get access to deals, leads get carry and startups get more capital with fewer meetings.
- Investors get access to a lead's investments and benefit from her experience in picking and managing investments. Investors can also invest as little as $1K.
- Leads get carry for their investments. They can invest 5–10x their typical investment amount, which gives them access to more deals and allows them to lead more deals. They may also get major investor rights. Finally, leads get access to syndicate investors who are often experts in the startup’s market.
- Startups get more capital with fewer meetings. They get the attention of a lead who is making a large investment. They get access to the syndicate investors’ networks without putting each one on the cap table. And they can easily collect many small investments.
Legal structure of a syndicate
Syndicate investors don't invest directly in a company. They invest in a special purpose fund that is created specifically for each investment. This fund then invests in the company. The corporate form of the fund is an LLC.
The fund is managed by Assure Fund Management and advised by AngelList Advisors, a wholly-owned subsidiary of AngelList. The lead also serves as a contractor of AngelList Advisors.
The lead does not invest through the fund but is required to disclose to AngelList Advisors how she votes, or if she buys or sells shares.
If there is a lead, the fund will usually vote with the lead unless she has a conflict of interest or there are other unusual circumstances. If there is no lead, the fund will usually vote with the majority of other shareholders
99-investor limit
Due to securities regulations, syndicates can only accept 99 investors in a deal.
A small number of investments support qualified purchasers who are exempt from this requirement.
Qualified purchasers include individuals with $5M in investment assets and companies with $25M in investment assets. A syndicate deal can accept up to 2000 qualified purchasers at the same time as 99 accredited, but not qualified, investors.
◙ INVESTORS
Investors information rights
Syndicate investors receive less information than direct investors. An AngelList entity or the lead will distribute the following documents to investors when they invest in a syndicate deal:
- Documents related to the fund’s formation such as its operating agreement, PPM and subscription agreement.
- General terms of the investment, if the company permits. Templates of deal documents signed by the fund may also be made available to investors.
- Qualitative updates on the company status, if available. This is high-level information similar to the information VCs provide to their LPs. For example, it may include information about the company’s customers or financing. It will generally not include any figures.
- Any information investors need for taxes, such as K-1s, is distributed annually.
How Investors receive their profits
You will receive your profits, if any, when the company is acquired or has an IPO. There may also be other opportunities for the syndicate to sell its shares.
When there is an exit opportunity, AngelList Advisors, in consultation with the lead, will advise the syndicate fund regarding the best time to sell the syndicates’ shares. The decision to sell the shares is then made by Assure Fund Management. This will generally happen soon after the shares become liquid. If there are any profits, they are distributed to the syndicate investors.
The syndicate fund, like all investors, is bound by restrictions with the company and can only sell shares in certain situations.
How investing in a syndicate differ from investing in a VC fund
Syndicates are intended to complement, not replace VC funds. Differences include:
- Syndicate investors can opt out of any deal or stop investing any time
- Syndicates have much lower minimums
- Syndicates are available to the general (accredited) public
- Leads typically personally invest more per deal than GPs
- Syndicates use deal carry
- Syndicates do not charge management fees
◙ INVESTOR'S FUNDING ACCOUNTS
Investor's Funding Information
Investor accounts are free
Funds are stored at Silicon Valley Bank, funds are FDIC-insured
Investors can increase or decrease their investment in a particular deal. Any change is subject to approval by the lead. Investors can also opt out of any deal.
An investor account only requires a minimum balance in the case of a syndicate. The minimum balance is equal to the largest backing amount.
Withdraw funds from investor's account to bank account takes 3-7 days.
◙ CONTACT ANGELLIST
The Service is operated and provided by AngelList LLC, 16 Maiden Lane, San Francisco CA 94108.
General Questions email: This email address is being protected from spambots. You need JavaScript enabled to view it.
Questions about funds: This email address is being protected from spambots. You need JavaScript enabled to view it.
Jobs & Recruiting email Support: This email address is being protected from spambots. You need JavaScript enabled to view it.
Syndicate Projects: This email address is being protected from spambots. You need JavaScript enabled to view it.
WebSite: www.ANGEL.co
◙ AngelList Review
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What is CrowdFunding and Major Project Categories
Crowdfunding is a web-based funding practice aiming to help entrepreneurs to raise funds from a large number of people (Crowd).What Is Crowdfunding?
Crowdfunding involves three (3) main parties:
1-Project Initiators (entrepreneur or other) who propose an idea (detailed project)
2-Contributors (individuals or group of people) who are willing to fund the project
3-CrowdFunding Platforms (web-sites) which bring together Project Initiators and the Crowd
Crowdfunding Growth Rates
Crowdfunding Growth Rates By Models The growth rates of crowdfunding during the past couple of years are astonishing and driven majorly by lending-based crowdfunding. Significant growth rates are found also in equity-based crowdfunding.
Growth Rates in 2014 (per crowdfunding model):
■ Lending Crowdfunding $11.08 billion (grew 223%)
■ Equity Crowdfunding $1.10 billion (grew 182%)
■ Hybrid-based Crowdfunding $487 million (grew 290%)
■ Royalty-based Crowdfunding $273 million (grew 336%)
■ Donation & Reward Crowdfunding grew 45% and 84% respectively
