Neil here.

What I love so much about our community is that we get the opportunity to dig into such an incredible variety of topics each week.

Medicine, crypto, robotics, software, even cannabis… if it has the potential to change the world, we’re probably discussing it together.

But sometimes, it’s important to zoom out a bit and go back to the basics… the foundational knowledge upon which all great angel investing portfolios are built.

Staying at the forefront of market trends is so important – but none of that matters if you haven’t mastered your core investing philosophies. Getting a handle on these concepts will be key to your continued success.

Let’s go over a few of the things you should know about what makes startups tick (especially the successful ones).

What is a cap table and how does it work?

A “cap table” (short for capitalization table) is like a roster of every person or entity that holds equity in a particular startup.

Most of the time, that’ll include:

  • The founding team
  • Any other company employees that have received stock options
  • Angel investors who have contributed capital
  • Important advisors who have earned equity with their connections or expertise
  • And the “whales” – venture capitalists, family offices, and so forth.

The cap table will clearly define the type of security each equity holder has, and how much. When you’re doing due diligence on a company, it’s a good idea to check out the table so you have a better idea of who the major stakeholders are. (You can also find out if you’re getting decent deal terms compared to other investors.)

You can learn more about cap tables here.

How is valuation determined?

This one’s a bit less straightforward… because different startups will approach the process in different ways.

Sometimes, the valuation of a startup is based on what a similar but more mature company is worth (called a comp).

Other times, the valuation is a multiple of the company’s revenue or other assets. In high-tech industries, intellectual property alone can drive the valuation.

If you really want to learn how valuations work, check out this article I wrote back in 2019. It’s got everything you need to know to price a company professionally.

When and how will I get a return?

There are so many different ways to get a return on investment as an angel.

There are deals that offer a revenue share – meaning when they make money, you make money.

Some pay dividends quarterly or annually.

But the most common way to make a return as an angel investor is by holding equity in a startup that has a successful exit.

Exits can include mergers, acquisitions, IPOs, direct listings and more.

As for the question of when you can expect to see dollar signs… the best advice I can give you is to not stress about that part too much.

Angel investments take three to five years to mature on average… But I’ve seen startup investments kick back returns in as little as six months.

My point is, it varies greatly. As long as you’re seeing traction within the company, don’t focus on how long you’ve been holding (in fact, if the company’s growing steadily, the longer you wait, the better your return is likely to be).

I hope some of what you just read helps you better understand angel investing as a whole. Let me know what you think in the comments below. If you found this content valuable and want to keep going through the foundational lessons, I’ll make it a regular addition to our conversations.

Thanks, and we’ll talk soon!

Neil Patel

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