What You Need to Know About Becoming an Angel Investor

If you've watched Shark Tank and dreamed of getting in on the action, you can be an angel investor—although it might not be exactly like what you've seen on the show. 

Becoming an angel investor takes knowledge, hard work and sizable investment capital. But if you go in with a smart strategy, you could see significant returns. 

Giving startups the push they need

An angel investor puts money into very early-stage companies. These startups might have an interesting business idea and a prototype, but they're far from proven successes. They use angel investments to create their products, hire employees and boost growth. In addition to money, angel investors also support startups by providing mentoring and using their contacts to make introductions for the company.

In exchange, the investor receives a sizable chunk of ownership equity in the company. If the startup takes off, angel investors can make a sizable profit.

What you need to be an angel investor

The first requirement is to have a fair amount of capital to invest. You may need to contribute a five- or six-figure sum to your startup of choice, so angel investing isn't an option for people with smaller portfolios.

Generally speaking, angel investors tend to be high-net-worth individuals. The SEC defines being high-net-worth by specific criteria:

• You have at least $1 million in assets, excluding your residence
• You earn over $200,000 per year as an individual
• You earn $300,000 per year in combined income with your spouse

However, if you don't meet these criteria, there's nothing stopping you from becoming an angel funder and making an investment in the amount that's appropriate for your finances. It also helps to have specialized knowledge of a field. For example, a retired pharmaceutical executive may focus on investing in biotech startups. Many cutting-edge companies may seem promising without an expert eye, but you'll need to carefully research your opportunities before committing.

More stake in the game

Imagine what your life would be like if you invested in Apple, Facebook or Airbnb at the very beginning. With angel investing, you have the chance to get in on the next big thing and see much higher returns than on the normal stock market.

Angel investing also gives you more hands-on control of your investments. When you buy shares of Nike or Apple today, you're just one of thousands of investors who don't have much influence on company decisions. But as an angel, you regularly meet with the startup founders and give them advice, mentoring and direction on how to run the company.

Because angel investing puts you on the cutting edge of business, you'll learn about new and interesting companies. At startup events, you'll meet entrepreneurs with innovative new ideas to solve the world's toughest problems.

What to watch out for

High potential for reward tends to come with higher risk, and angel investing is no exception. A small percentage of startups hit it big, while some see middle-of-the-road success. Others fail altogether. There's a chance that when you put money in a company, you won't see any returns. The goal is to find one investment that does so well, it makes up for the others that lose money. It is important to diversify your investments and take time to create a financial plan that works for you.

Finding the next successful startup won't happen overnight. You may need to spend months attending events, meeting entrepreneurs and studying their plans before you find one that's a match. Once you find a good startup company, you'll need to go through a long legal process to prepare a term sheet contract to join as an investor.

From there, you'll need to keep meeting with your founders and support the company however you can. This type of investing is much more labor-intensive than just buying shares on the stock market. Angel investing won't be a great fit for those seeking a more hands-off investment opportunity.

Getting started

If you think you have what it takes to be a successful angel investor, see what startup events are going on in your area. Most cities and states have organizations running classes and networking events for startup founders and investors. If there aren't any nearby, you can also search for online startup organizations. This is a great way to meet potential entrepreneurs whose ideas you could invest in, as well as startup lawyers who can advise you on potential deals.