If you want to succeed as an angel investor, you need to be willing to wait.
Angel investments aren’t like stocks. You can’t buy, hold, and sell as you please. When you write a check for an entrepreneur, you’re essentially locking that money up – and it may take years to see it come back.
Now, conventional wisdom states that you should be prepared to sit on your hands for up to 10 years; but in reality, the average holding time is between two and four.
But there’s one little-known way that many angel investors are able to “take the money and run” – way ahead of schedule.
Here’s how they do it: they sell their shares to another, bigger angel. Or, in even better cases, to one of the institutional investors who show up later in the game.
This doesn’t happen extremely often – in fact, some deal terms won’t allow you to sell your stake at all. Still, it’s a real possibility. And, with startups waiting longer than ever to go public, big investors increasingly need to seek out other ways to buy into early-stage businesses.
Be wary, though, that if a big dog is sniffing around your stake… you may not want to sell it. If venture capitalists want to chomp up your equity later in the game, you can bet it’s because they’re seeing dollar signs. So, if you can afford to hold your stake a little longer, you should seriously consider doing so.
Sometimes, though, you just want to be done waiting. Or maybe you’ve run into some financial setbacks and feel you’d benefit more from selling than you would from holding. Or maybe you have your eye on a new car.
Whatever your reasoning, if you want to make an early exit, ask a lawyer if your terms will allow you to liquidate your stake. Or, better yet, talk to the entrepreneurs themselves. They may know of someone else in the network who’d be interested in buying.
The worst-case scenario? You hold onto your shares and watch them grow a little longer, then cash out with everyone else when the startup makes it to an exit.
Would you rather cash out a 3X in two years, or a 1,000X in 10 years? Leave a comment below and share your thoughts!
Until next time,