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Terms to know as an Angel Investor

When in the position of either going out in search of capital or evaluating the right business opportunity to put your money into, there are a handful of common angel investment terms that you should be familiar with. Don’t worry- you won’t be expected to understand every single term out there, but having a baseline of knowledge of the concepts below will put you in good shape!

 

People in the Ecosystem

Accredited Investor

An accredited investor is an individual or entity that meets certain financial criteria set by the SEC (Securities and Exchange Commission). Accredited investors have the opportunity to participate in private placements, including angel investments. These individuals are typically high-net-worth individuals or institutions with the expertise and resources to invest in early-stage companies. (Learn more about building a pathway to accreditation here!)

 

Founders

Founders are the visionary individuals who conceive and establish a startup. They are the driving force behind the company, responsible for its inception, growth, and overall success. Angel investors sometimes work closely with founders to support their entrepreneurial journey.

 

Board Director

A board director is a member of a company’s board of directors. These individuals play a crucial role in overseeing the company’s strategic direction and ensuring that it operates in the best interests of its shareholders. Angel investors may serve as board directors, offering their expertise and guidance to early-stage startups.

 

Advisory Board Member

Advisory board members are experts in various fields who provide strategic advice and industry-specific knowledge to a startup. They are not typically involved in the day-to-day operations but contribute valuable insights to help the company succeed. Angel investors may also take on advisory roles.

 

 

Company Information Sources

Cap Table / Capitalization of the Business

The cap table, short for “capitalization table,” is a document that outlines the ownership structure of a company. It details who holds equity, how much they own, and the types of equity (e.g., common stock, preferred stock). Angel investors scrutinize the cap table to understand their potential ownership stake in the company.

 

Common Stock 

Common stock represents a residual ownership stake in a company. You own a residential claim to the company’s profits and assets, but the decision to distribute them is made by the board and you are only entitled to what’s left after all other obligations of the company are made. Owning or holding common stock means getting to weigh in on corporate decisions by voting for the board of directors and corporate policies. This type of equity can offer attractive returns, however if a company has to liquidate its assets, common stockholders are at the back of the line, getting paid after bondholders, preferred shareholders, and other creditors.

 

Preferred Stock 

With preferred stock, you have a higher claim to dividends or asset distribution than common stockholders, but still less than bondholders. It has characteristics of both bonds and common stocks, in that it pays fixed dividends and equity, which enhances its appeal to certain investors seeking stability in potential future cash flows, however the details of each preferred stock depend on the company and issue. How often they can be paid, if they are fixed or set in terms of a benchmark interest rate, voting rights, etc. 

 

Corporate Bond 

This is a type of debt security issued by a corporation and sold to investors, effectively lending money to the company in return for a series of interest payments, but can be actively traded on the secondary market. When considering a bond, consider the backing: can the company repay? What are its prospects for future revenues and profitability? Are there physical assets that could be used as collateral? Corporate bonds are given ratings by U.S. rating agencies, grading their risk profile. Triple-A bonds are the safest while “junk” are, well, junk. Since corporate bonds are considered to have a higher risk than US government bonds, interest rates are almost always higher on corporate bonds, which can lead to higher returns, but also a riskier investment. 

 

Term Sheet

A term sheet is a non-binding agreement that outlines the key terms and conditions of an investment deal. It serves as a blueprint for the formal investment agreement and covers aspects such as valuation, ownership percentages, and investor rights.

 

Deal Room

A deal room is a secure digital platform where investors and entrepreneurs can collaborate and share confidential information during the due diligence process. It streamlines communication and ensures that all parties have access to the necessary documents and data.

 

Carried Interest / Deal Carry

Carried interest, often referred to as “carry,” is a portion of the profits that angel investors and venture capitalists earn when they exit an investment with a positive return. It’s typically calculated as a percentage of the investment profits and is a key incentive for investors to support startups.

 

 

Company Stages of Fundraising

Friends & Family

The friends and family stage is the initial phase of fundraising, where founders seek capital from their close network of friends and relatives. It’s a critical stage for early-stage startups to secure seed funding and validate their business concept.

 

Pre-Seed

Pre-seed funding is the first external capital injection into a startup. It typically helps founders develop their product, conduct market research, and build a prototype. Angel investors often participate in pre-seed rounds to provide the necessary financial support.

 

Seed

Seed funding is the stage where startups seek capital to launch and scale their operations. This round helps fund product development, market expansion, and customer acquisition. Angel investors play a significant role in seed rounds, often alongside venture capital firms.

 

Seed+

Seed+ rounds are subsequent funding rounds that follow the initial seed round. They are designed to provide additional capital for further growth and development. Angel investors may continue to support the startup at this stage.

 

Series A, B, C, D, and Beyond

Series A, B, C, and D rounds represent the later stages of fundraising, with each round providing more substantial capital for scaling the business. These rounds are often led by venture capital firms, but angel investors who participated in earlier rounds may still be involved.

 

 

After the Investment 

An exit refers to the sale of a company that you invested in. Exits and the X% returns you hear about from successful, high-profile exits are what make angel investing so alluring. However, a high percentage of angel investing exists result in little if any capital returned to the investor. But a solid process for due diligence and post-investment support of companies can lower the failure rate from 60% to under 50%. The deal terms of your investment also play a huge role in determining the return you get upon exit.

 

Deal terms found in investment term sheets to be aware of: 

Valuation

What the company is worth. If you get the valuation wrong, as in too high, you could hurt yourself in the long run. Your out-right return multiple will naturally be lower, even if the company succeeds, because you received a smaller take for your investing dollar, and because you might be significantly reducing the chances of the company succeeding at all. Inflating a company’s valuation in early rounds makes it harder to raise money in later rounds because it’s unattractive relative to the progress they’ve made.

 

Liquidation Preference

Your right to get paid before common stockholders and a basic driver of returns. Can be expressed as a 1X, 2X, 3X or higher. But don’t let the X deceive you. There are a lot of reasons to avoid multiple liquidation preferences and stick with a 1X! 

 

Option Pool

A block of shares specifically allocated for a company’s employees. The size of the option pool dilutes the value of the investment for both founders and investors, so is an important thing to ask about and negotiate during fundraising rounds. 

 

Protective Provisions

These give you say in decision-making like board seats or approval rights, and give you information, control, and a say in future decisions for the company. 

 

Participation Rights 

Give you the ability to participate in future financing rounds if you see the company doing well want and want to double-down! 

 

There are loads of other terms like co-sale rights, drag-along rights and dividends when it comes to exits. Working with a group of investors, like She’s Independent, can help mitigate risk by crowd-sourcing knowledge, questions, and ensuring all terms of the deal are considered and negotiated to align with the intended interests of the investors! 

 

Angel investing can be a complex but rewarding venture for accredited individuals interested in impact and growth for early-stage ventures. By familiarizing yourself with key terms and concepts, you’ll be on your way to equipping yourself to make informed investment decisions that can contribute to the success of startups and your own financial portfolio. If you are interested in taking a deeper dive into the world of private investments, head to our website and check out our free Intro to Angel webinar hosted by our Founder, Natalie Levy!

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