[101] Everything you wanted to know about angel investing
With a small plug for our operator investor angel investing syndicate
When I left Chime, I wanted to get a pulse on the fintech ecosystem and learn about the companies that were building the next big thing in fintech. As a part of that effort, I started talking to, writing about and advising companies in the space to learn more about what was going on outside of Chime. I soon realized that there were opportunities not just to advise but to invest in great companies driving financial impact. And I found that having an operator experience was incredibly helpful because we understood the practical realities of the challenges and opportunities companies were facing and had actual solutions from our experience.
So I partnered with Baishi Wu, a Group PM on the Lending team at Chime with background in both PM and Finance. And we added Twitter great Maia Bittner, a Business Operations Lead at Chime, who founded multiple companies, ran investing syndicates and had an incredible investor network. And we put together an operator syndicate of Chime with current and former employees to invest in early stage fintech companies.
So we started building 2 Days Early, a fintech investor syndicate by operators, for operators. We believe in the potential to create valuable fintechs focused on providing better options for everyday people, like getting paid 2 Days Early. Our members are early Chime employees turned entrepreneurs, investors, and operators. We have extensive backgrounds in growth, product, engineering, operations, finance, and more. Companies we invest in get access to our deep experience, our extensive network, and our desire to create and empower impactful companies with real lasting value.
There was only one problem, but it was a big one.
I knew almost nothing about investing or syndicates and neither did a lot of our members. While I had participated in angel investing for a few years by then, I really didn’t understand the mechanics of investing, how platforms like AngelList and Sydecar worked and how to get dealflow.
So with a combination of a ton of help from Baishi and Maia, the helpful advice from the folks on the Alumni Syndicates slack and some of our own research, we put together this comprehensive FAQ for angel investing and syndicates. We originally shared this only with our syndicate, but we think it’s useful enough to share it with the world.
Have feedback, comments or concerns? Want your primer or article to be included? Shoot us a message and we’ll try to keep improving this resource.
And of course, the obligatory disclaimer - individual situations may vary so please seek the advice of a tax or legal professional as this does not constitute investment advice.
What we’ll cover
What even is angel investing and what is the purpose of a syndicate?
How can I be an angel investor if I have no money?
Do I have to invest in order to participate in the community?
What is AngelList/Sydecar and how do syndicates use it?
How much should I be investing in each deal?
What is a SAFE? What is a valuation cap? What is a discount?
What should I do if I want to actually invest in a company?
Are there any fees that I should be aware of for participating in a deal?
Are there any other resources for learning more about angel investing, syndicates, AngelList, and investing in startups more generally?
What even is angel investing and what is the purpose of a syndicate?
A syndicate is a fancy word to describe a group of people who pool their money to make an investment together. Operator Collective has an awesome primer on angel investing that answers all the questions you have that you were afraid to ask like:
What is angel investing?
How is angel investing different from investing in a venture fund?
How do I set a budget for angel investing?
What if I don’t have a lot of capital to deploy?
How do I manage risk?
What do I get out of angel investing?
How can I increase the certainty of a solid angel investment?
Here’s a great video explainer on syndicates from Brian Nichols of Hustle Fund and here’s some suggestions for angel investors from Brad Feld of Foundry Group.
How can I be an angel investor if I have no money?
Maia has a great overview that captures some of the benefits of angel investing as a way to learn, build a reputation, and gain private company equity. In our case, we believe being part of 2 Days Early will solve both the people and knowledge aspects! Elizabeth Yin also has a great thread on how to write small checks in early stage startups and why angel investors don’t need to be rich to participate.
Do I have to invest in order to participate in the community?
No, Chime employees and alum are welcome to join the community to support one another even if they choose not to invest in the deals presented to them.
What is AngelList/Sydecar and how does [our syndicate] use it?
A syndicate allows multiple smaller investors to participate in lead investors deals as a single entity, instead of having to individually write checks to that company.
AngelList is a platform that enables investors to easily invest in early stage companies using multiple types of investing instruments, including syndicates. Angellist has a bunch of additional primers on syndicates and angel investing in their Help Center (including how syndicates are different from investing directly in companies, what some key terms like allocation, cap/uncapped, LP, carry (carried interest) mean, how carry works).
We also love using Sydecar for deal syndication as they can be more flexible and lower cost than AngelList. They have all the basic features you’d expect from a syndicate platform, and we especially love that they provide K-1s on time, every time. They don’t provide the same access to a vast network of investors like on the AngelList network nor do they have the same level of integrations with other third-party software. But they are still in their early stages of development and they’ve already got a bunch of great features that we love.
How much should I be investing in each deal?
If you’re new to angel investing, here’s our general guidance:
Set an annual budget that you’re okay with not having access to for a while (or forever). Ultimately, you’re investing in startups and there’s a probability that they won’t succeed and your investment goes to zero. Either way, your money is going away for a while. Even in the best case it’s locked up in illiquid stock for ~10 years. If venture investing is ONLY about the money for you, you should probably limit yourself to 2-10% of the value of all of your investments (including those outside of 2 Days Early). If it’s doing more for you (status, fun, learning, etc) this percentage can increase (for Maia it was near 100% for years).
Decide on how many investments you want to make. We recommend planning on investing in 3-30 startups per year to get exposure to a lot of opportunities, diversify your investments and have the most fun.
Decide on your check size. If you’re new to seed-stage / angel investing, it’s highly recommended to have a consistent check size (see this awesome blog post from Ilya Sukhar on why this makes sense). For participating in this syndicate we recommend deciding on a check size between $2K-$10K (our minimum check size is $2K).
So yes, if you do the math, some people might be investing $6K per year, and some people might be investing $300K per year. We can support the full range of annual budgets on [our syndicate].
What is a SAFE? What is a valuation cap? What is a discount?
Josh Ephraim has an awesome and straightforward guide to SAFEs that you should check out (along with numerical calculations), but we’ve summarized a few points here. A SAFE (Simple Agreement for Future Equity) is a legal framework that allows very early stage startups to raise money prior to formal priced investing rounds, when the valuation is still unclear because the company is so early.
A SAFE isn’t equity or debt per se - it “converts” into equity at a later stage when the round is priced. But if there’s no valuation, how do we know how much of the company our $80K allocation buys us? And how are we rewarded for being an early stage investor? That’s where valuation caps and discount rates come in.
The discount is one way to represent the reward for being an early investor. Basically, if the company raises another round, we will be able to get into that round at a discount to other investors in that round. Let’s say a company ends up raising a $5M Series A at a $25M post-money valuation. Normally our ownership stake would be $80K / $25M = 0.32%. But we get a 20% discount, so our ownership stake is $80K / ($25M * (1-20%)) = 0.40%. Discounts usually only come into play when the company raises below the valuation cap.
The valuation cap is another way to represent the reward for being an early investor. It is described differently, but I like to think of valuation caps as another form of a discount. If the company raises another round, we will get a discount equivalent to whatever our valuation cap is as compared to that round’s valuation. Taking our original example, if a company raises a $5M Series A at a $25M post-money valuation, we would get a discount equal to 1- [$15M / ($25M post-money - $5M money in)] = 25%. Our ownership stake with this option would be $80K / ($25M * (1-25%)) = 0.426%
As SAFE investors, we get to choose which type of discount we prefer. Since the valuation cap is higher, we’ll be able to take the valuation cap to maximize our ownership of the company. Having both a valuation cap and a discount is beneficial for early investors and gives us the most flexibility.
What should I do if I want to actually invest in a company?
Instructions are specific to AngelList’s platform but should apply for all syndicates, not just 2 Days Early. We’re laying out how our syndicate operations work but this may differ for different syndicates.
If you're a backer in our syndicate, you'll see an email from Angellist inviting you to view the [Company] deal on Angellist (subject line "[Syndicate] invited you to invest in [Company]").
We'll send another update in Slack a day or two after, but syndicate backers will get first access to invest so join the Angellist syndicate to get first dibs!
You'll be able to click "View Deal" which will take you to the deal page where you'll see the investment memo and the key terms of the round.
You will see an "Amount to Invest" section where you'll be able to enter the amount you're ready to invest and click "Invest."
When you click that button, it'll take you to a confirmatory screen that will ask which entity is investing, and ask you to confirm a few disclosures.
Money will be pulled first from your AngelList account balance (if any) and then from your connected bank account.
You'll get a series of subsequent emails from AngelList tracking your transfer (confirmation of transfer start, confirmation of transfer received, and final documents on investment)
Boom. You did it! You invested in [Company]! Congrats!
You will have an official stake of the syndicate SPV (special purpose vehicle) that has a stake in [Company]. You'll continue to get ongoing investor communications via AngelList on a regular basis, and you'll receive tax documents from AngelList for your investment.
Are there any fees that I should be aware of for participating in a deal?
Syndicate deal fees: Both AngelList and Sydecar have certain administrative fees that go towards the syndicate operations and management platform
For AngelList, this is a fixed $8K fee that AngelList charges to run an SPV, handle legal, compliance requirements, and handle ongoing tax requirements. Since the fee is fixed per deal / SPV, a larger allocation means that the fee would be smaller. On an $80K allocation, the fee would be $8K / $88K or ~9%.
For Sydecar, the fees are more flexible for small to medium sized deals. There’s a minimum fee of $4,500 or 2% of the total deal value. That means that you’d pay ~$4,500 for an $80K allocation and until $450K+ deal size, you’ll pay a lower fee than AngelList
Carried interest ("carry"): This is a fancy term for the share of the profits from a deal. It is typical in venture capital that 20% of the share of the profits from a deal are given to the partner who sourced and managed the deal.
In our syndicate, we also charge 20% carried interest. We give 15% to the person who sources the deal, manages startup relationship, secures allocation, manages comms and writes the memo and we give 5% to the syndicate partner who reviews memos, handles the deal submission and ongoing syndicate operations.
Are there any other resources for learning more about angel investing, syndicates, AngelList, and investing in startups more generally?
Definitely - here’s a bunch of other great resources to look at with some commentary from the folks who aggregated the lists (not us):
How to Be an Angel Investor (blog post) by Paul Graham (cofounder of Y Combinator): the original and the best intro to angel investing. Note some of the valuation figures have shifted over the last 10+ years, but the core message is as true as ever.
Angel: How to Invest in Technology Startups (book) by Jason Calacanis: a fun and quick read on how to launch your own angel investing career.
So You Want to Start Angel Investing A very thorough post by Justin Kan, the co-founder of Twitch and investor in over 100 tech startups. Covers what to invest in, how to get dealflow, and how to start.
Honest Advice for First-Time Startup Investors From a Long-Time Investor- Great primer on how to approach angel investing, and how not to cause more harm than good.
11 Angel Investing Lessons - Great distillation of the things that really matter when it comes to returns.
How to be an angel investor - PG, the founder of Y Combinator, sold his start-up in 1998 and then started angel investing seven years later. It seemed mysterious and complicated but turned out to be easier than he expected.
Angel investing: start to finish - Holloway has been writing beautiful and deep analyses into different topics and this one an angel investing doesn’t disappoint. They explore how lead investors evaluate deals, how legal teams write up term sheets. The only thing to consider is that it might focus more on priced rounds and as an angel investor, you might be evaluating deals based on SAFEs, which have different legal considerations and economics to consider.
FTTea with Cokie: So You Wanna Angel Invest.. - Cokie wrote a great article after making her first angel investment. To sum it up, 1. back people, not ideas, 2. secure your own bag first (max your 401k, have a solid emergency fund, etc), 3. get to the root of what your goals are for angel investing and make sure you’re getting that out of the experience.
How to Angel Invest, Part 1 - Naval is the founder of AngelList who has made angel investing more accessible. In this podcast, he shares more advanced topics covering the pitfalls of bridge rounds; how pro-ratas work; how can you squeeze into a round when there are VCs leading; when a co-investor is providing a valuable signal versus when they’re just talking their own book; how to size up markets and startups quickly; whether you should specialize in a single vertical or diversify into multiple verticals. Considering how much the landscape has changed in the last 1.5-2 years, getting to an oversubscribed round is even harder than it was then…
10 Essential Tips For New Angel Investors - I like the first tip that Chris shares: “don’t rush.” When I started investing there were always these deadlines that stressed me out: the round is closing, the founder needs commitments, I met the founder a week ago and need to send an answer. If it doesn’t feel right, then take your time. You might say “no” for this round, but there will be more opportunities later.
Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups - This might be a little outdated at the moment, but it does give a general overview of what angel investors should consider. From an angel investor point of view, it feels like it comes from the lens of a wealthy individual instead of an angel operator so it might be best to look for portfolio construction information from other sources.
All the Angels interviews - They’ve done 18 interviews so far with different angel investors with different backgrounds and these are great examples of what an angel investor thinks about, especially with the new rise of angel operators, angel founders, and venture investors personally investing.
I asked 7 angel investors how they got started, how they evaluate companies, and what they wish they had known - Jess aggregates advice from different angel investors, sharing what motivated them to start angel investing and what advice they share with aspiring angel investors.
The Angel J curve - The Angel J-Curve is a guiding framework to better understand the opportunities available for operators in Silicon Valley-based on your time and revenue (social/working capital) in the ecosystem.
The essential guide to syndicates - Paige is an entrepreneurial investor who is leading her own syndicate. She also is an engineer at WorkOS, a company backed by Lightspeed Venture Partners. In this article, she illuminates the definition of a syndicate, the advantages and the disadvantages of joining one. She also shares some tips if you’re interested in setting up your own syndicate (Note: This would mainly apply for those setting up syndicates in the US)
Crowd Funding Edition: Real life Angel Investing Returns 2012–2016 - Angel investing returns are particularly opaque, Yun-Fang shares more about her experience and portfolio returns over a 4-year period. Interesting share-out for a topic that can be really opaque.
Angel Investments vs. Stocks: A Practical Guide - Yun-Fang shares a helpful guide to consider returns from angel investing versus stocks. The biggest difference between public markets and start-up equity is the illiquidity of angel investing: “I just had the first IPO announcement from my portfolio after 9 years. Matterport is actually my very first angel investment. It’s going to return about 40X but I had to wait for 9 years with a lot of ups and downs in between.”
Investing in Public: Non-Obvious Lessons from 100+ Angel Investments - This is a great in-depth essay about angel investment from a founder who has made over 100 angel investments. I will say he probably could find other founders who had the potential to succeed because he was a successful founder himself as the CEO of BrightRoll however I think the lessons still generally apply.
Suggestions for Angel Investors by Brad Feld of Foundry Group: a great foundational framework for thinking about your angel investing strategy and your goals from being an angel investor.
You're Living Inside the Gold Mine Compelling view from Naval on the opportunities (size of returns, tax advantages) of angel investing in tech, especially through syndicates such as the one we are putting together.
Honest Advice for First-Time Startup Investors From a Long-Time Investor (Medium post) by Roy Bahat of Bloomberg Beta: great primer on how to approach angel investing, and how not to cause more harm than good.
Great Twitter thread on Angel Investing $1K checks from Elizabeth Yin of Hustle Squad
Video on how Syndicates Work from Brian Nichols who started the Lyft Alumni Syndicate. This 5 minute video provides a great overview on what we are building with Funding Secured and our unique Limited Partner base.
Video on Portfolio Construction from Hustle Fund's Eric Bahn, which dives into % of investable income to think about putting towards startups, how to ensure diversification, and the power of small checks