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Emerging entrepreneurs and people outside of startup ecosystems often have limited experience with the formation of early-stage investments. The angel investing process, in particular, is theoretically simple but more complicated in practice. Not every angel deal process is identical, especially across different regions and types of industries, but they mostly have common characteristics. Here’s an overview of the angel investment process.

Identifying Companies that Need Financing

Most angel investors start by building their portfolios and access to innovative startup companies. For many new angels, it can take a while to find a startup in the local ecosystem and time to build a reputation as someone founders want to work with. As angels gain experience and recognition, they can become a member of an established group or fund and it’s easier for founders to find and interact with them. Referrals and reputation often bring awareness of promising deals. 

Deciding to Work with a Company

Angles go through a vetting process to separate the companies they want to work with and invest in from the ones they want to pass on and avoid. Many angels have criteria or checklist they follow, but many will primarily trust their instincts. Angels who are members of a group, network or fund generally put the deal through a screening or scouting process (sometimes called a deal flow committee). They weigh factors like the upside potential, fit with their investment focus, no red flags and the company’s overall desirability compared to other options in the market.

Next Steps when Considering a Company

When it comes to making a final decision about a company, there needs to be a consensus among partners. Most angels spend time with the startup founders and their team to learn their story and interact with them.

Most teams then pitch their business opportunity to the angel investors. It could be an informal process for one or two solo investors. Or it might be a formal, organized pitch as part of a regular forum for funding. Many angel groups hold monthly or quarterly meetings where emerging or innovative startups can pitch a handful of angel investors in one go. A Q&A session usually follows these formal presentations. Investor groups are efficient, decisive and transparent in their decision to invest or withhold from investing. They also provide generous feedback and advice after the pitch is presented.

Some angels may invest directly after a pitch is presented, but many undergo a modicum if not a significant amount of due diligence beforehand. This process is about asking questions and trying to confirm key assumptions while identifying easily avoidable mistakes. As the deal progresses, due diligence can involve modeling and scenario building.

Individual angel investors may undergo additional sit-downs with the team and more research or reference checking to ensure a good deal. Networked teams may find it more helpful to have a formal effort to identify issues on a longer checklist and complete a formal due diligence report that syndication partners and peers can use.

Due Diligence and Timesheets

Angels conduct the next step before the end of the diligence process. If due diligence is running smoothly, the angel or angel group manager who leads the deal will begin discussions with the entrepreneurs about prospective deal terms. 

Here, issues like valuation, deal structure and deal terms are negotiated, with the goal being to agree upon a mutually acceptable set of terms and document them in a term sheet which is shared with the completed diligence report

Deal Syndication

The next step is to find the money to fill the round. As angels finish the due diligence and term sheet issues, they are also learning how much investor interest there is in the company and how much money they should find to fund their end of the deal. This process is referred to as deal syndication. The entrepreneur and the lead investor then work together to bring desirable investors on as soon as possible. During this process, some key issues include alignment between investors and alignment between the management team and investors, along with value-add in terms of connections and expertise. It’s also crucial to find investors who accept the term as negotiated. Not every investor can re-negotiate the deal terms. Otherwise, it would be a never-ending and chaotic process.

Signing Legal Documents

Before any checks are written, legal documents need to be drawn up, and a closing should be prepared. Term sheets are used as the instructions for how to write up the documents.

The process is generally simple and straightforward since all the large issues are already memorialized and decided upon in the term sheet. Still, many concepts are open to interpretation or require more detail and so numerous pages of legal documents are needed. There are plenty of opportunities for the non-drafting party to request changes to the first draft of terms. Expert counsel is typically involved here since they understand market norms and standards. Typically, it might take a week to draft, a week to negotiate and then a week to finalize. 

The Closing Process

Next, a closing date and process are outlined, and the definitive documents are sent to all the angel investors who have indicated their intent to invest with money. Investors then start to pay as the documents often instruct for returning signatures, mailing checks or wiring funds. 

From the investor’s perspective on the receiving end, completing the closing package is hard desk work, and not the most exciting part of angel investing. When investors have a lot of companies in their portfolios, desk work is frequent. Thankfully, it’s the last step in the funding round, but it doesn’t mean the work stops here. 

Stepping into an Active Angel Investor Role

Once angel investors sign their deal, the best angeles feel they are responsible for helping however they can by offering advice, mentorship, introductions and, in some cases, board service. Since startups often have first-time entrepreneurs at the helm, there are many ways angel investors can help. Collective help from angel groups can have a positively influential impact on a company’s success.