How to be an angel investor

paulgraham.com

When we sold our startup in 1998 I thought one day I’d do some angel investing. Seven years later I still hadn’t started. I put it off because it seemed mysterious and complicated. It turns out to be easier than I expected, and also more interesting.

The part I thought was hard, the mechanics of investing, really isn’t. You give a startup money and they give you stock. You’ll probably get either preferred stock, which means stock with extra rights like getting your money back first in a sale, or convertible debt, which means (on paper) you’re lending the company money, and the debt converts to stock at the next sufficiently big funding round.

There are sometimes minor tactical advantages to using one or the other. The paperwork for convertible debt is simpler. But really it doesn’t matter much which you use. Don’t spend much time worrying about the details of deal terms, especially when you first start angel investing. That’s not how you win at this game. When you hear people talking about a successful angel investor, they’re not saying “He got a 4x liquidation preference.” They’re saying “He invested in Google.”

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