You’re reading an excerpt of Angel Investing: Start to Finish, a book by Joe Wallin and Pete Baltaxe. It is the most comprehensive practical and legal guide available, written to help investors and entrepreneurs avoid making expensive mistakes. Purchase the book to support the authors and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.
After his first two years of angel investing, Pete had the equivalent of a bad hangover. $200K had disappeared into companies that had looked very promising but had failed. He had invested too fast, committed too much to a single investment, failed to do thorough enough due diligence in one case, and committed one or two other angel investing mistakes. It can be gut wrenching to watch a company you have invested in fail, and take with it a couple years of your kid’s college tuition, or more.
Angel investing can be fun, financially rewarding, and socially impactful. But it can also be a costly place in terms of money, time, and missed opportunities. This book is intended to help you optimize your experience as an angel investor and avoid some pain by learning from those who have gone before you.
If you want to read a book about “How to make millions in angel investing without even trying,” this is not it. In this book you are going to learn from our successes, failures, and collective experience working on angel deals. We are going to talk about how to be good and thorough at the often rewarding work involved, how to increase your chances of success in a world where 80%-90% of startups fail,* how to position yourself to stay involved with your companies, how to increase your payout when your investment succeeds (we’ll show you how VCs do it), and what to do if things go sideways. In short, we want to help you improve how you go about angel investing so that you make the most of your money and your time.
If you invest in a successful startup, your economic return will be driven by the legal arrangements you have with the company. You don’t want to miss out on a great economic return because you failed to ask for an important legal term when you made an investment. It is a terrible thing to find a great company, make an investment, but ultimately miss a great financial outcome because you overlooked something important. To that end, we discuss many of the legal and business issues investors face when evaluating deals, negotiating terms, and working with entrepreneurs in good and bad situations. This knowledge should allow you to engage in angel investing with more confidence in every aspect of the process. This book will reduce your need to seek expensive legal advice; and when you do need to talk to a lawyer, you will have the context that will make those conversations more efficient.
Whenever possible, we have included conventional wisdom about being a successful angel investor, based on the experience of successful investors and data about angel investing outcomes. When it comes to legal matters, we have tried to be as accurate and up to date as possible, but you should know that in some cases there are multiple definitions for some commonly used terms. We endeavor to always explain the ones we use. Additionally, angel investing isn’t a science, it’s situational—for every piece of specific advice, someone will have a counter example. Every company and investment opportunity is unique, which is part of what keeps it interesting. We don’t pretend that every piece of guidance applies in every case, but have endeavored to give you the context that will help you make your own decisions.
This book will help both new and seasoned investors gain confidence. If you are interested in angel investing or already actively engaged as an angel investor, this book is for you. We do not assume any prior knowledge of how to find or evaluate companies, or investment techniques or terms. But we do go deep enough that even a seasoned investor can learn something new, and we have endeavored to organize the book as an easy reference for many of the common investment forms and terms.
founderThis book will also be helpful for founders raising an angel round. The content covered here will help you understand the point of view of the investors, where they can be found, and how to meet them. It will also help you understand the term sheet when you negotiate one with an angel or angel group. We explain what all the terms mean, how they work, and why they may exist in your term sheet and investment documents. (In this book, material with a founder perspective is marked with this icon.)
We also explain how investors (and entrepreneurs) should think about due diligence and what should be covered. This can be a handy reference as you prepare to make an investment or seek funding.
We had the feedback of a lot of our friends in writing this book. To give thanks to just some of who helped us, and not in order of importance: Thank you Mary Baker Anderson, Bryan Brewer, William (“Bill”) Carleton, Barnaby Dorfman, Jeff Greene, Mitchell Hymowitz, Mike Koss, Adam Lieb, Josh Maher, Brandon Nett, Dave Parker, Gary Ritner, Dan Rosen, and Nancy Thayer. If we have forgotten anyone, please forgive us.
Pete would also like to thank The Academy, and his lovely wife Carol and charming daughter Katelyn for putting up with his long hours of writing when he should have been mowing the lawn or waxing the skis or baking bread. And, of course, he would like to thank the book’s editor, Rachel, who made the whole process fun.