Education Center

Getting Started


The education center

We established the education center as a tool for new investors to get acquainted with some of the most important aspects of angel investing. While the information here is not exhaustive, it is a good starting point.

The education center is sorted by topics and covers some of the main aspects of angel investing, such as financing structures, investment terms, valuations and the term sheet. We also included suggested further reading.

Learning by doing

While the education center can give you an overview and help you get started, investiere believes in a guided “learning-by-doing”-approach. On investiere, new investors invest alongside experienced angel investors that bring venture capital experience and industry expertise to the table. By using the Q&A forum of each investment proposal and attending investor meetings, new investors can learn from this diverse group of investors who all have different backgrounds, mindsets and approaches.

Once you have gone through the education center, we encourage you to browse the investment proposals, make use of the Q&A sections and have a closer look at the documents section of the specific investment proposals you are interested in.

Further reading

Here is a good introductory essay by Paul Graham on how to be an angel investor.



The risks of angel investing


Is investing in startups as a private investor risky?

Yes, investing in startups is very risky and a majority of startups fail. While it is possible to make a return on investment as an angel investor, you could also lose all of the money you have invested. Given the high-risk profile of this asset class, most angel investors allocate only a small portion of their overall investment portfolio to startup investments. Have a look at our risk warning for an overview of the risks.

What are the main risks of angel investing?

Apart from loss of investment, startup investments are highly illiquid, dividends are very rare and investors are likely to be subject to dilution in future financing rounds. Have a look at our risk warning for more information.



Diversification


What is diversification?

Diversification means that you don't bet everything on one investment. Instead of investing a large amount in one company or in one asset class, most experienced investors would agree that it is better to spread the same amount over numerous investments.

How does diversification apply to startup investing?

Diversification applies to startup investing because historically the majority of returns have come from a small number of companies. Returns on startup investments are usually unevenly distributed with a large part of returns hailing from a small number of investments. While hard to grasp, it is not unusual for the return of one company to be bigger than the rest of the startup portfolio investments combined.

In theory, the more you spread your investments out across many companies, the more likely you are to invest in companies that will be successful and generate a return. While there is no guarantee that diversifying your investments will lead to a good return on investment, the general consensus is that diversifying your startup portfolio should lead to better returns as opposed to not diversifying.

However you need to also bear in mind that even if you invest in a large number of companies, diversification will not necessarily save you from having poor returns in your portfolio.

Further reading on diversification

Here’s a good article by Chris Dixon on hitting big or missing big, or what is also known as the "Babe Ruth Effect".

And here’s Paul Graham’s take on the power law curve and its implications for startup investments.

Fred Wilson discusses the implications of the power law curve on his daily business as a venture capitalist.



Common startup financing structures


What are the different types of financing structures used to invest in startups?

In general there are two types of financing methods to invest in startups: equity financing and convertible notes/loans.

What is the difference between equity and convertible notes/loans?

An equity financing involves the issuance and sale of stock in a company to investors.
Convertible notes are structured as loans with the intention of converting them into stock at a later stage when a priced equity round takes place in the future.

Further reading on financing structures

Here’s a good piece by Chris Dixon on Convertible notes vs. Equity Investments. Make sure to also read the comment section of the article as some leading venture capitalists weigh in on the discussion.



Startup Equity


What is equity?

Equity represents an ownership interest in a given company. If a company has 100 shares of stock and you own 10 shares of stock in the company, you effectively own 10% of the company.

Normally founders, employees, and investors all own various forms of equity in the company (rights may vary between investors and non-investors).

What is common equity or common stock?

Common equity, also referred to as common stock, is typically the stock held by founders and employees. This equity normally has fewer rights associated with it than preferred equity.

In the event of a liquidation, common shareholders only have rights to a company's assets once preferred shareholders and other debtholders have been paid in full.

What is preferred equity or preferred stock?

Preferred equity, also referred to as preferred stock, is typically purchased by investors in an equity financing for a startup company. This class of ownership in a company has a higher claim on the assets and earnings than common stock. It also typically comes with additional rights that common stock does not have.



Preferred Equity


What are the rights that can be linked to preferred equity?

Preferred equity typically includes rights that provide additional protection to investors ahead of the holders of common stock. The exact terms and rights that are linked to preferred equity will differ according to company and financing round and can include a liquidation preference and anti-dilution rights.

What is a liquidation preference?

This is a term used in venture capital contracts to specify which investors get paid first and how much they get paid in the event of a liquidation event, such as the sale of the company or an IPO (initial public offering at a stock exchange). For example, a liquidation preference can protect investors by making sure they obtain their initial investments before holders of common stock. If the company is sold at a profit, the liquidation preference can also help investors be first in line to claim part of the profits. It is typical that preferred stockholders are repaid before holders of common stock and before the company's founders and employees.

Here’s a good post in which Brad Feld explains the liquidation preference in more detail.

And here is an explanatory article from the MaRS library.

What are pro-rata investment rights?

Pro-rata investment rights give an investor the right to participate in future financing rounds, thus enabling investors to maintain their percentage of ownership in the company.

Here is an article by Fred Wilson explaining the concept in more detail.
And here is an article by Fred Destin on the topic.

What are anti-dilution rights?

Shares with anti-dilution rights protect investors in the event that the company should raise additional capital in future financing rounds at a lower valuation. Investors seek protection against such cases, since a lower company valuation in a future financing round would imply that the monetary value of their shares went down. There are different types of anti-dilution clauses, such as weighted average anti-dilution protection and full ratchet.

For more information, see Brad Feld’s post Term Sheet - Anti-Dilution

What is a drag along agreement?

With a drag along agreement, the majority of shareholders can force the minority of shareholder to join in the sale of a company. In such a case, minority shareholders have the right to sell at the same price, terms, and conditions as any other seller.

Read Brad Feld’s take on Drag Along.

Further reading on preferred share rights

Here’s a good piece by Fred Wilson on the three key terms that should be part of a startup investment.

Chris Dixon lists what he would describe as ideal first round funding terms.



Convertible Notes/Loans


What is a convertible loan/note?

A convertible note/loan (or simply a convertible) is an investment vehicle used in early-stage startup investments when the parties involved wish to delay establishing a valuation for that startup until a later round of funding. Convertibles are structured as loans with the aim of converting them into equity at a future equity round. The loan is automatically converted to equity at a specific milestone, often at the valuation of a later funding round. In order to compensate the angel investor for the additional risk of investing in the earlier round, convertible notes include clauses such as caps and discounts.

What is a discount in a convertible note/loan?

A discount in a convertible defines a reduction at which the convertible loan will convert relative to the next qualified priced round. Effectively this permits an investor to convert the amount of their loan (plus any accrued interest) into shares at a discount to the purchase price paid by investors in that round. Discounts usually range from 0% to as high as 35%.

Read Jason Mendelson’s explanation on the discount in a convertible note.

What is a cap in a convertible note/loan?

A cap sets the maximum valuation at which the convertible loan can convert into equity.

Jason Mendelson explains the cap in more detail.

What does the maturity date indicate on a convertible note?

The maturity date of a note indicates when the note is due to be repaid to the investor along with any accrued interest or converted into equity at a pre-defined valuation, if it has not yet converted to equity.

Further reading on convertible notes/loans

Jason Mendelson and Brad Feld have written a series of articles that discusses the various aspects of convertibles in great detail.

While some angels prefer convertible loans over equity investments in early rounds (such as Paul Graham), others are more critical or even disagree in principle with the concept (such as Mark Suster and David Rose). While others still take a more balanced approach on the topic (such as Seth Levine.



Valuations


What is a startup valuation?

This is the monetary value of a company at the time of an investment. Investors and founders try to come to an agreement around how much the company should be worth and this can often be one of the main discussion points during the negotiations of deal terms.

What is a pre-money valuation?

Pre-money valuation refers to the valuation of a company prior to an investment or financing round. If an investment adds cash to a company, the company will have different valuations before and after the investment. The pre-money valuation refers to the company's valuation before the investment.

What is a post-money valuation?

The post-money valuation refers to a company’s valuation right after an investment. For example, if a company has a pre-money valuation of CHF 10 million and raises CHF 2 million from new investors, the post-money valuation is CHF 12 million. The investors who invested CHF 2 million in that particular round of funding measure their share of ownership of the company as follows: CHF 2 million devided by CHF 12 million, or 16.67% of the company.

How does valuation impact investment returns?

The valuation determines how much of the company the investor obtains for his or her investment. This is reflected in the per share price that an investor pays and thus directly impacts how many shares the investor obtains for his or her investment. The more shares a shareholder owns, the more the shareholder will benefit in case of a liquidity event (trade sale or IPO).