Angel Investor Requirements: Everything You Need to Know
Accredited investors are those with an annual income of $200,000 or a net worth of at least $1 million, excluding a primary residence.3 min read
2. Understanding the Risks
3. Having Relevant Experience
4. Learning From the Community
Updated November 19, 2020:
Angel investor requirements include having:
- A liquid net worth of at least $1 million.
- The time and patience for the long term.
- The relevant experience to understand the field.
- The right community around you to help you learn.
Becoming an Angel Investor
Accredited investors are those with an annual income of $200,000 or a net worth of at least $1 million, excluding a primary residence. Companies that raise money from accredited investors are not subject to many of the securities filings with the U.S. Securities and Exchange Commission (SEC) and state regulatory bodies. Therefore, most equity fundraisers look for capital from these accredited investors. Many experts believe that angel investors must be accredited.
In fact, historically, angel investing opportunities were only available to accredited investors. Title III and Title IV of the JOBS Act changed that somewhat, giving access to investors under Regulation A+ and Regulation CF+. Investors who don't meet the criteria to be accredited can now invest under A+ and CF+, giving angel investors new opportunities and definitions in capital markets.
This type of investor looks for companies in the early stages of growth, which means the risk level is high. Because many companies won't survive, angel investors must diversify. Typically, these investors put $25,000 to $50,000 into each company. In less common cases, the range can go as low as $10,000 and high as $100,000.
For a full portfolio of as many as 20 companies, an angel investor must be comfortable with investing from $200,000 to $500,000. This is not the type of investing you do with your entire nest egg. Most angels aim to put 10 to 20 percent of their investable assets into these projects. Mr Rose, the founder of New York Angels, states, “If you take a look at the numbers, I think you'll find the average angel investor has somewhere north of $5 million and south of $100 million in assets.”
Understanding the Risks
The inaccessibility of the money, once it's placed into an angel project, is disturbing to many investors. Most are used to more liquid tools like stocks or other kinds of property. Angel investors must also be prepared for projects to fail as often as they succeed. “In the case of angels, if half your companies die, that's par for the course,” Rose says. “For many people, failure is not an option, and they can't psychologically deal with it.”
While the risks are high, so are the potential rewards. Statistically, one in every 10 or 20 investments explodes and brings in an impressive return, hopefully making up for any failures.
Having Relevant Experience
Most angel investors have entrepreneurial backgrounds. Thus, they know how to grow an investment portfolio because they have experience with the startup phase of a company. “You'll see a lot of entrepreneurs in a particular area — whether it's life sciences or technology or consumer products — come back and invest in that space because they have a background they can bring to making a smart decision,” says Rose.
Learning From the Community
Rose says that angel groups give aspiring investors an excellent place to learn. “Most angel groups do not commit you to write a check the very first day,” he says. “You have time to actually observe and see what happens, and see what companies present. … If you're in an angel group, [it] has deal-flow, so you can see the companies coming in, and the group has a process for screening. They get five to 100 deals a month coming in, and they ultimately present two or three or four to the whole group.”
Those new to the field can watch how others operate and make decisions. This helps the learner understand the field in more detail and develop his or her own style. Working on a few projects in partnership with a more experienced investor helps build confidence.
“Now that you have investments in a few companies,” says Rose, “maybe you become friendly with those CEOs, you start going to conferences, you get invited to demo days from accelerators because you're a proven investor, and you get to see more and more companies. This is one of those things where you can never have enough practice, so the more companies you see, the more deals you do, the more you learn. I'm still learning and I've done 90+ companies at this point.”
If you need help determining whether you meet the angel investor requirements, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including working with or on behalf of companies like Google, Menlo Ventures, and Airbnb.