Angel Investor Checklist: Check the Downside First

TL;DR: Before writing a check, an angel wants to know how the money gets lost. That means the team, the document, the cap table and the odds of a follow-on round, all before the upside. Per an Angel Capital Association survey cited by Investopedia, only 11% of angel ventures end positively.

On a submarine, nothing got signed off until someone had tried to break it. I put my name on more than 1,000 QA jobs in the Navy, and I carry that habit into every angel check. I ask how I lose before I ask how I win. Upside is easy to imagine, which is exactly why I leave it for last. It keeps me honest when the founder is likeable, the deck is clean, and three people I respect have already said yes.

What does an angel investor actually do?

An angel is an accredited individual who invests their own money in an early-stage company in return for equity or convertible debt, according to the Florida Office of Financial Regulation. The same page says angels often bring industry knowledge and take an active role in the company.

So the check starts a relationship that can run for years. The full job description lives in What Is an Angel Investor? The Real Job Description Beyond Writing a Check. Here I'm staying on the decision that comes before the wire.

What do angels check before they invest?

They check the ways the deal can fail, in a fixed order. I work down this list and stop at the first answer I can't live with.

Check	The question I ask	An answer that ends it for me
Loss size	If this goes to zero, does it change my life?	A check large enough that I'd think about it every week
Team	Verify before you trust: who are these people, and what have they actually built?	Claims I can't confirm with a call to someone who worked with them
Instrument	Do I hold a note, a SAFE or priced equity, and what does each give me?	The founder can't say what I own if no round happens
Cap table	Who owns what today, and what happens to my share in the next round?	A table that changes every time I ask for it
Dilution	Are there anti-dilution terms, and who do they protect?	Protections for later investors that I don't get
Runway	How many months of cash, and what has to be true to raise again?	A plan that needs the next round to arrive on schedule
Portfolio fit	Is this one of the 15 to 20 companies I planned to back?	A one-off bet I'd be sizing on gut
Exit	Who would buy this, and why would they pay more than I did?	No named type of buyer, only "a big company"

There's no row for the market-size slide, because a big market can't rescue a cap table you don't understand. If you can't answer a row, you don't have a deal yet. You have a pitch.

The team row is where I spend the most time, and it's the one I learned the hard way. I've trusted people who later turned out to be frauds, and the pitch was just as polished as the honest ones. Now I call someone who worked with the founder before I wire anything, and I ask what went wrong on that project, not what went right.

The instrument row decides how much of your money is protected if things stall. Our guide to convertible notes for angel investors and the comparison of SAFE notes versus convertible notes show how the same valuation cap can sit on very different legal footing. For the dilution row, anti-dilution provisions are worth a careful read before you sign anything.

How much should one check be?

Small enough that a total loss is an ordinary bad year. If you already write checks, the useful comparison is against your own history. The Angel Capital Association survey cited by Investopedia found checks of about $42,000 for more experienced angels and $25,000 for less experienced ones. It also found that experienced angels kept about 15% of their portfolios in startups, against 7% for less experienced ones.

If your average check or your allocation sits well above those, ask yourself what you know that the survey group didn't.

Here is the position I'd hold you to. Three checks is a gamble, and a portfolio of 15 to 20 companies is an investment, because venture is a power-law game where one company can return the fund and most return nothing. At $25,000 a check, that's $375,000 to $500,000 committed over time. That's simple arithmetic, not a target for you. If the total makes you flinch, shrink the check, not the company count.

Stage matters as well. The Angel Capital Association reported that angels put more than 50% of their dollars into Series Seed in 2021, nearly 60% of deals. At seed the next round is the whole question, so the runway row in the table above carries the most weight. A strong team with eight months of cash and no lead for the next raise is still a bad bet.

How do angel investors get paid?

Only when the company is sold or goes public, and only if it gets that far. You hold equity or a note that converts, and cash comes back at an exit. Nothing arrives in between unless the company chooses to return money, which is rare this early.

For companies that do survive, the Angel Capital Association put the median return at 2.7X in 2021. That figure covers only companies still operating at the time of exit, so it leaves out every company that closed. A median taken from the survivors will always look better than the portfolio you actually hold.

If you want to back one company alongside other investors without each of you sitting on the cap table, an SPV pools everyone into a single vehicle that holds the stake. It doesn't diversify you, since you still own one company. It also adds a layer of fees, and I read that layer before I read the pitch.

Do angels actually help the companies they back?

On average, the research says yes. A National Bureau of Economic Research summary reports that startups with angel backing are at least 14 percent more likely to survive for 18 months or more after funding than firms without it.

That finding describes angel-backed firms as a group, across 13 angel groups in 12 countries. It can't promise your check will help, and it says nothing about whether the company will make money. What it does suggest is that a good angel's time has real value to a founder, so pick deals where you can be useful and say no to the ones where you'd only be watching.

Angel or venture capital: how do the two differ for you?

The difference that matters to you is who does the diligence. A venture firm has a fund committee, associates and reference calls built into its process. As an angel you have yourself, maybe a friend who's seen the sector, and the table above.

That's the whole reason the checklist exists. The angel investor versus venture capitalist comparison goes through the structural differences if you want them side by side. If you'd rather find a group to split the diligence with, the angel investor directory lists groups, networks and family offices.

Common mistakes

Wiring money because someone you trust is already in is the one that has cost me most. I've backed people I trusted and lost money on it, and the trust did none of the diligence for me. Their being in tells you they said yes. It doesn't tell you what they checked.

Another trap is treating the cap as the whole deal. A valuation cap is a number in a document, and it says little about whether you hold debt or a contract for future equity. Read what happens if the next round never closes.

Writing two or three checks and calling it a portfolio is a quieter error. With only about 11% of ventures ending positively, according to the survey Investopedia cites, a handful of checks is a bet on luck.

Skipping the follow-on question catches people at seed. If the company has to raise again within the year, ask who will lead it and what they'd need to see. A founder with a named lead and a date has done the work. One with only a feeling that it'll come together hasn't.

FAQ

What does an angel investor do?

An angel puts personal money into an early-stage company for equity or convertible debt, according to the Florida Office of Financial Regulation. Many also advise the founders. The check starts the relationship, and the work after it is where an angel earns the position.

Which is better, VC or angel investor?

They do different jobs, so neither wins outright. Venture firms invest pooled fund money and run a formal process. Angels invest their own money, usually earlier and in smaller amounts. Pick the one that matches the round you're looking at and how much diligence you can do yourself.

How do angel investors get paid?

Cash comes back only if the company is sold or goes public. Until then your money is locked in equity or a note, and a 2.7X median from the Angel Capital Association applies only to survivors. Plan for years of nothing.

Who is the most famous angel investor?

There are well-known names, but fame says nothing about whether a deal fits you, so I won't rank them. Study how any angel sizes checks and protects the downside, and copy that instead of a name.

The Bottom Line

A good angel check is mostly decided before the founder finishes the pitch, by the rows you couldn't fill in. Take the last deal that was pitched to you, even one you passed on, and go through the table one row at a time. Find the first row where you couldn't get a straight answer. If you'd like more of this each week, the free AIN briefing sends the downside-first read on private-market deals to your inbox.

Educational content only. Not investment, tax, or legal advice. Not an offer or solicitation to buy or sell securities. Past performance does not guarantee future results. Private-market investments are illiquid and involve risk of loss, including total loss of capital. Consult qualified advisers. Angel Investors Network is not a broker-dealer or investment adviser.