David Weekly's Angel Investment Deck. Meant as an introduction to investing in US-based companies as an accredited investor. Covers Angel List, syndicates, syndicate funds, venture capital, common risks and pitfalls. NOTE: Does not constitute legal or financial advice and is not a solicitation for investment.

1. Angel Investing 101
Making & Losing Money As A Hobby
david@weekly.org
Online / Public Version → read the speaker notes!

2. Disclaimers
This is not legal or financial advice. Consult a lawyer/CFP/CPA.
There may be material errors in this presentation. (Hopefully not too many.)
This is very risky stuff; never invest angel money you can’t afford to lose.
Please give feedback to make this course better!

3. Who This Course Is For
Accredited investors*
investing in early-stage, privately-held
US-incorporated tech startups.
*
I'll define this in a few slides

4. Prework
Please read my
Guide to Stock and Options
now.
Read the Third Edition.
The first two had some pretty material errors. ;)

5. Some of What We Will Try To Cover
Cautions & Definitions: Control, Dilution, Liquidity
Venture Capital: Structure & Returns
Angels, Angel Groups, AngelList, Syndicates
Crowdfunding
Deal Flow
Being a Great/Terrible Angel

6. What We Will Not Cover
(but feel free to ask questions)
Meeting your retirement goals
Fancy sh*t like Variable Prepaid Forward Options
Investing as an unaccredited investor
Structuring advisory agreements
How to start a company / hire / etc.

7. Important Distinction
Startup
A high-risk, potentially high-reward enterprise
that will likely fail but could potentially scale to
be worth billions.
Usually: TAM >$1bn, gross margin >50%
Goal: Scale.
Small Business
A enterprise formed with a goal to sustain
operations profitably and grow as-needed to
fulfill customer demand. Can grow into a Big
Business over the course of many decades.
Usually: Time to first revenue <3mo.
Goal: Cash-flow positive.

8. My Background
Founded two startups: one still independent, one acqui-hired by Facebook.
Founded Mexican.vc (2010), drone.vc (2014), and neuron.vc (2016).
Global startup mentor & advisor w/several notable exits (Plaxo, Attassa,
Like.com, YourTrove, PistonCloud). Wrote “Guide To Stock & Options for Startups”
and “The Mechanics of AngelList Syndicates”.
Founded Hacker Dojo (coworking space), investor in 40+ startups, advisor in
10+. EIR at Trinity Ventures, mentor at Founder Institute.

9. Why Be An Angel? (Good Reasons)
Give back to the startup community
Exposure to entrepreneurial energy & ideas
Learn how about how early concepts are framed
Inspiration for how to think about your own startup ideas
A small part of a broad investment portfolio (max 10% net worth)

10. The Right Expectations
Most startups fail. Of those that don’t, most fail to return capital.
You will have very little control or visibility into your investments.
Your investments will be nearly wholly illiquid.
Successful investments may take 9+ years to achieve liquidity.
One investment that does well will likely moot all the others.
It’s incredibly difficult to predict which startups will win: diversify!

11. Cautions, Definitions, & Risks

12. Cautions
You will probably fail to beat the public markets.
80% of VC firms failed to beat ETFs.
(They are professionally bad at their jobs!)
You should make sure you enjoy the process at least as much as the outcome!

13. Accredited/Qualified
Accredited Investor:
● Single and 2015 & 2016 you made >$200k and expect that in 2017.
● Married and 2015 & 2016 you both made >$300k and expect that in 2017.
● or $1m in assets not including your primary residence.
Above assumes you’re investing as an individual, not e.g. a Trust.
>$5m in assets? You’re a Qualified Purchaser - even fewer restrictions.

14. Sophisticated
Sophisticated Investor: new for 2016
Not very well defined by the SEC -- but a “pre-existing, substantive relationship”
is required between an issuer and investor, requiring the issuer to evaluate the
investor’s “accreditation, financial sophistication, financial circumstances and
ability to understand the nature and risk of the interests being offered.”
When joining AngelList you must cite the people you know in your investor
application as evidence of your sophistication. Saying you took this class will
help! Ideally you will have also made other startup investments.

15. Risks for Angels
Dilution: Company requires a lot of capital to get to success / some flat
rounds. You’ll get very little protection against dilution: even if the company is
successful you may end up with little.
Acquihires: Early-stage company “sells” to another in deal great for founders
& employees but investors might end up with little-to-nothing.
Carve-outs: Mid-stage company sells to another with carve-outs for founders,
managers, and later investors. Angels get little to nothing. (Usually this is a bail
out / escape valve.)

16. High Risks for Startups
Lack of Product/Market Fit: Nobody wants what’s being built & couldn’t
“pivot” to something that did make sense / came to market too early.
Bad Model: CAC > LTV, money-losing machine.
Founder Exhaustion: Want free food, 401k matching, and parental leave. ;)
Cash Management: Team not scrappy enough / didn’t raise enough.
Legal: Fundamental premise of business offering not found to be lawful.

17. Medium Risks for Startups
Bad Board: Founders lose voting control, forces founding team out &
replacement CEO is lame / forced early sale.
Visa Issues: Foreign founder loses right to be in US.
Infighting: Founders squabble, distracting team & causing bad atmosphere.
Talent: Team can’t hire the talent it thinks it needs / gets poached.
Zombie: Product can’t transcend niche appeal, making enough to keep the
lights on but without growth / uninvestable.

18. Low(er) Risks for Startups
Outright fraud: Founders ran off to Caribbean with seed capital
IP: Sued out of existence by patent troll / mean big company
Theft: Another company steals the startup’s ideas and out-executes them

19. Venture Capital

20. What is a VC?
A professional whose job it is to invest other people’s money in high-risk, high-
return companies.
GPs: General Partners put in >1% of fund’s capital & direct decisions.
LPs: Limited Partners (e.g. pension funds, sovereign wealth) provide the $$$.
Funds generally last 10 years (but get extended as needed); half set aside as
“dry powder” for follow-on / pro ratas.

21. VCs are Paid on “2 & 20”
2% annual management fee (funds under management) - pretty high for
people bad at their jobs! These numbers are getting pushed downward.
20% “carry” - profits after returning the fund. Generally requires a “unicorn”.

22. Typicalish Round Sizes
$100k - $250k: passive / vertical follow-only funds: SkyFund, KPCB Edge
$250k - $2m: seed / microVC: Flywheel, Felicis
$2m - $20m: Series A (“venture” round): Sequoia, Greylock, KP, Andreesen
$5m - $50m: Series B (“growth” round):
$10m++: Series C & beyond (“expansion” round)

23. VC Caveats
Not every good business is VC-investable.
Carry only paid after returning a fund!
Excellent results for team may not be excellent VC results:
● 5 people, $5m/year generating $3m/year profits
● $50m exit on $5m invested.
500 Startups is working on making this a new venture asset class: doubles &
triples. Published results July 20 in WSJ: 18-23% IRR.

24. VC Tips
Associates don't pull much weight; find a partner who will make the deal
happen.
Partner meetings often on Mondays; that’s when decision is made on the spot,
right after the pitch.
Typical timeline: one partner (sniff) → two partner (vet) → area leads (assess
readiness) → full partner meeting (invest)
30-60 days to close, diligence is intensive. Pitching is a full-time effort so try
and do it infrequently! Better to have inbound than outbound.

25. Angel Investment Structure

26. Taxes on Equity
● Act of investment not taxable (received same value as paid)
● Held for <12mo: Short term cap gains = income (~40% fed + ~10% CA)
● Held for >12mo: Long term cap gains = 15-20% fed + ~10%CA
● Held for >60mo: Qualified Small Business Stock (if C corp, <$50m post)
0% fed, can roll over sooner than 5yrs to new QSBS w/0% tax! (
Lots of caveats/AMT, talk to your lawyer!)
Cap gains clock only starts running once you acquire shares. Not options, not
convertible notes, not a SAFE note.

27. Instruments: Convertible Note
Technically a debt instrument (with requisite interest) but never designed to
be repaid in cash. At the next equity round, the debt converts into equity.
Benefits: quick legal paperwork, very typical / doesn’t raise eyebrows.
Typical seed: 12 month term, 6% interest, 20% discount, $5m cap, 2x liq.
Watch out for uncapped notes, esp with a larger (long runway) raise.
Term duration is just a formality.

28. Other Instruments
SAFE Note: Variant of convertible note without awkward dates. Relatively
common, won’t raise eyebrows. However, weak protections - some stories of
early SAFE investors getting pushed out / diluted deliberately.
Series Seed: Simple / standardized priced equity round. Won’t raise eyebrows,
much faster & cheaper than full Series A. Benefit of starting long term cap
gains clock immediately.

29. Mechanisms for Coming To Terms
“Lead”: You set the terms of the investment, management agrees. Do this
after you’re comfortable.
“Follow”: Some other investor set the terms, you get the same terms as
them. Start as an angel following experienced investors.
“Party Round”: Management team set the terms of investment and is
looking for investors to agree to those terms. Be careful for overvaluation /
uncapped.

30. Sourcing
Direct: Deal exposed to you through your network. You connect with founders
and are personally brought into the deal.
Syndicate: Deal exposed to you through fellow Angel on AngelList. You invest
through their syndicate.
Angel Group: You pay a fee to participate in a group of angels that have
startups pitch to you.
Incubator / Demo Day: Program that presents startups to you for
investment

31. Sourcing Tips
Be focused - in what communities are you known? What kind of startups want
to come to you? Hang out your shingle, connect with those communities, reach
out to founders in the vertical.
Reach out to your network - make sure they know you’re actively investing and
in what.
Scrub through AngelList & Crowdfunder for promising deals in your area.
Consider participating in or starting a syndicate to scale.

32. Flags for Early Stage Companies
NDA: Won’t actually tell you what the company is or does out of fear you’ll
steal their idea. Asks you to sign an NDA. (It’s okay if they ask you to keep their
special sauce close to the vest - and obviously do honor this.)
Not a Delaware C Corp: Can cause serious issues in later rounds; should
ask them to convert/incorporate as Delaware C corp ASAP.
Patents: Emphasizes that their value is that they’ve “filed patents” (probably
just unenforceable provisionals) especially for relatively simple consumer
software.

33. Flags for You
Conflict w/your employer: Startup is in any way close to your day job in a
way that could cause the perception that you’re either feeding your Employer's
secrets to the company or vice versa. Definitely avoid personal investments in
your Employer's vendors, especially if you have a role in vendor selection. If it
feels like it could be awkward, disclose to Employer.
Portfolio Conflict: If you’ve already invested in or are considering an
investment in a similar company, maintain a “Chinese wall”; very bad form if
something leaks from one to another - the karma bank is real!

34. Valuing Startups
Mostly magic. Start by watching others & developing an opinion.�
Valuing by revenue/cash flow multiples only works for mature businesses.
Saner: by TAM weighted by risk weighted by likely dilution. (If this all goes well,
how much would these shares really be worth, discounted against failure %.)
For very early stage, even TAM will be unclear. Goal should be to give the
company enough $ to materially advance the company for next 18mo and to
have enough % to be interesting but small enough to leave room for A, B, C...

35. Evaluating Startups
Do they make you/others excited about the opportunity? Do they have vision?
Do they actually understand their customer and technology? Can they explain it
to you? Do they respond defensively or comprehensively?
Is the team rapidly iterating to improve their offering or are they planning a big
splashy release?
What motivates the team? Are they going to stick through The Long Grind or
are they fixated on an exit? What are they trying to prove?

36. Being a Great Angel
Forward articles relevant to the company (clients/competitors/acquirers/research)
Share (non-Employer related) ideas with them.
Brag about them on social media when they hit key milestones.
Introduce them to potential partners, hires, acquirers, customers, other portfolio
companies!
Solicit new investment opportunities from them!

37. Being a Bad Angel
Leaking!
Demanding special rights / advisory shares / retainer agreements.
Exercising RoFRs, demanding a sale, halting a sale.
Calling notes.
Attempting Board takeovers.
Micro-managing.

38. Overall Strategy
Get buyin from your S.O.!!
Don’t invest more than ~10% of your net worth.
Set aside some money for follow on / pro ratas.
Aim to build a basket of 30+ startups over 10 years.
Be someone who people want to get investment from!

39. AngelList Syndicates

40. Syndicate Overview
Influential angel says “invest alongside me; same terms!” (syndicate lead)
Pitches deal to followers after committing to invest.
$8k/deal fee to AL, they manage all the backoffice. ($0 management fee)
Typical: 5% carry to AL, 15% to lead (lead % can vary by syndicate)
New: can apportion carry to advisers.

41. Syndicate Funds
New (2016) vehicle to automatically invest in a portfolio of companies the
syndicate would invest in with guaranteed best-access.
No additional carry or per-deal fees.
$20k fixed fee for setup of fund.
No investor control over which companies syndicate invests in.

42. Crowdfunding

43. Customer money is best money.
Non-dilutive! Zero interest! Cash to execute up front! Validation!
But - hard obligation to deliver; software timelines are hard and hardware
timelines even harder.
“I’m sure I can just fly to Shenzhen and get this prototype turned into a final production
line in a few weeks - it can’t be that hard, right?”
Hardware often more expensive to deliver than customers paid; need to
supplement. But Kickstarter has transformed hardware plays.

44. ICOs?!

45. Deal Flow & Evaluation

46. Beginning
Join someone you trust alongside them, see how they evaluate deals and find
deals, soon you will learn how to use these powers yourself. Syndicates are a
good way to do this.
Your dealflow will be proportional to your network but don’t “network”, be
useful to people. Word will spread.

47. Plant a Flag
Have an opinion - have a controversial view on where the world is going and
put your money where your mouth is. Returns will be proportional to the
correctness and unusualness of your insight.
Mexican.vc → “Why on earth would you invest in a place so ridden with crime and drugs?”
- racism and poor data blinded other investors to the opportunity.
Be specific enough to be the first - everyone in the drone space wanted to talk
to me after I announced drone.vc as the world’s first drone fund. Deals
that come to you are great.

48. Solicit
Remind friends, family, and colleagues that you invest and to keep a lookout for
companies in the spaces you want to invest.
Post about your industry, learn more, have an opinion.
Convene good folks in the industry. It’s incredibly useful and helps place you at
the hub of the network.

49. Evaluate
Meta: you’ll probably screw this up so err on the side of investing less in more
things.
(Attempt to) control for your biases and spend disproportionate time on folks
who don’t look like Bill Gates. Women, ethnic minorities, etc. Check out
NewME.
Fixate on product; does the team understand the problem they’re solving and
who they’re solving it for? Does the leader have charisma? Would you work for
them? Do they listen and learn? Confidence + humility.

50. Act
Don’t leave an entrepreneur hanging, make a decision quickly.
Give feedback about why you invested or didn’t invest. Few investors do and
mature entrepreneurs value the candor. Be kind in how you frame it, though.
If you’re investing, make a best effort to get other investor friends on board;
bringing someone a quality deal is a gift that will likely be repaid in time.

51. War Stories

52. Advisory Agreements
Took a two year vesting NQSO grant for helping source key hires. Grant didn’t
have acceleration on Change of Control. Company took a long time to issue.
One month after issuing they were acquired in a large cash transaction. I got
1/48th my grant. �

53. Zombies
Founded a company, grew it to 4m users/mo, valued at ~$20m, owned most of
it. �
Then company took longer than expected to break out, had down rounds.
Then washed out. Company still running, I own 0.01%. �

54. The Long Grind
Led small round in brilliant pair of techies who were literally starving when I first
met them. One had just arrived from Anchorage - the other, Latvia. They met
on IRC. (Pro tip: this is a good sign.)
Latvian ran into visa issues and returned to Latvia, Alaskan gave up and
literally stopped emailing with anyone else, including co-founder. Reasonable
people would give up here.
Latvian fired him, became CEO. Company still running and growing after 5+
years. Total funds raised <$100k.

55. Travis Kalanick
1st company: Scour. Sued for hundreds of billions. Oops.
2nd company: RedSwoosh: raised millions, bottom fell out of market,
everyone else left, single-handedly built it back up from the ashes, sold to
Akamai.
3rd company: Uber. Yay! But..
Overnight successes are often a decade+ in the making.

56. Sean Parker
1st company: Napster. Raised millions. Wrote a bad email that got the
company sued out of existence. Got fired from his own company.
2nd company: Plaxo: raised millions as CEO and founder, got fired from his
own company.
3rd company: Facebook. Raised millions as President, got fired from his own
company, but not until he taught Zuck how to not get fired. Owns $bns in $FB.
4th company: Airtime. Oops.

57. Thank you!
Feedback Welcome: david@weekly.org // @dweekly // AL