What are some signs that an “angel investor” is really a “devil investor”?

Some top signs trouble may come later from an “angel” investor:

  • The terms are way, way, way too complicated. To me, this is flag #01 by far. Angel investing should be simple. What matters is price, check size, and maybe, pro rata rights in the next round (if you have a significant amount of capital to invest later). Nothing else really matters. Complex, multi-page term sheets for an angel investment are signs of problems to come.
  • Too much focus on control. Money should have checks-and-balances. No one should have to worry that founders will misuse funds. But investors shouldn’t be worried about controlling board of directors, or rights to pick the CEO, etc. in an angel round. If you are selling > 20% of your company, granting a board seat to the investors is fair. But even there, it should be simple.
  • Confused about the risks, needs too many financial models and financials. Asking for a financial model is more than fair. But there isn’t 30 days of financial analysis to do in an angel investment. The company just isn’t far enough long. If the financial diligence is too complicated, something is off.
  • Haven’t made enough similar investments. 9 times out of 10, try to avoid angels that haven’t already made similar investments. It’s too hard for new investors to get their arms around the risks and issues.
  • Haven’t made money from investing yet. I wouldn’t use this as a bright line. But it’s better to have investors that have already made money from tech investing. You don’t want tourists.
  • Can’t get a straight answer. Are they are in or out? It’s fair to ask. And “not today, but maybe in a few months when I see more progress” is also fair. But try to avoid folks that just take too long to come to a conclusion.
  • Can’t afford it. Can’t afford to lose it all. My final point. Avoid whenever possible angels that just can’t afford it. No one should be putting more than 10% of their liquid net worth into angel investments. And you probably need to do at least 20 of them to spread out the risk. That means anyone investing more than 0.5% of their liquid worth into your start-up is … risky. Risky to freak out. To worry too much. To be more trouble than they are worth. Mom and dad MAY be an exception. That worked out well for Amazon and Atlassian. But other than that (Mom and Dad, and maybe even there), make sure the investment isn’t a material amount of their cash on hand.

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