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Comment by yeldarb | Hacker News Reader

At least for me, a big part of it has to do with the shift almost entirely to convertible notes.

When I made my first angel investment ~10 years ago almost every opportunity was priced. Now almost everything is a note (either with a very high cap or no cap and a small discount).

I like to know what I’m buying.

And if a startup is saying they’re going to grow 1000x in 18 months but wants to cap my return over that timeframe at 20% that seems like a raw deal considering the very high risk that they won’t be able to raise at all.

I applaud them for being able to get it done. But it’s been 2 years since I’ve made my last angel investment. I’ve allocated that money to stocks instead.

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Just exactly how were they proposing to cap your return? A safe or note with a cap is designed to cap the price you pay for shares, not cap your return.

Safes or notes without a cap are rare

No price cap or a high cap means the discount is your max return during the period between when you wire your money and the priced round. Compare that to what an Seed VC or A Round VC would look for between their round and the next.

As an angel in that scenario, you’re investing with the risk profile of a very, very early company but the return profile of a later investor.

True but there is still value investing in no cap deals: access. It gives smaller investors access to deals they normally would not have. Angels would not typically have the opportunity to join later.

It also bypasses the sometimes arcane and high friction step of trying to value an early stage company.

I think everyone here has read these points in favor of notes many times. It's the counter arguments that never get written down.

Note that access isn't very useful if the returns aren't there (see the capped return point).

I would guess it has more to do with many of the "best" angels who would round up syndicates just raising their own funds, first from the syndicates they would round up and then others. I have several investors that fit this mold and know of a bunch of others.

Is it really true that no-cap is the new norm? Are these institutional seed funds doing no cap convertible note deals? Anyone?

I thought it was the other way around, that 5-10 years ago you could get no cap but now everyone wants it priced. Especially if the round is a big one.

Of the 500 or so pitches I have heard in the last six months in Silicon Valley and San Francisco, about ten proposed a no cap note--a few of these with a discount and a few with no discount. These were almost entirely Stanford students at a single Stanford event, so I think that was more about targeting rich alums who might wish to help new entrepreneurs at the Alma mater.

What kind of net worth should you have before considering angel investing?

> What kind of net worth should you have before considering angel investing?

Thumb in the air, angel investments should be no more than 2 to 3% of your liquid (sellable, with minimal price disruption, within 90 days) investable assets. (One should also be an accredited investor.)

So if you're cutting a $10k cheque, you should have $500k socked away in liquid investments and $1 million in total assets. If you're cutting two $25k cheques, you should be investing out of a portfolio of ~$2 to 3 million.

You probably want 10 or 20x of that. Assuming your bets are uncorrelated and all have the same standard deviation, the standard deviation (volatility) of your portfolio is going to be:

stddev_portfolio = sqrt(n)*stddev where n = # of investments

Personally, I don't think I would be comfortable with the risk unless n > 25 or something around that.

Angel investing is for everybody :)

But fits squarely into the "5% of investible assets" category, aka HIGH RISK.

Two things about angel investing I wish I'd had a better grip on when I made my first handful:

1 - Very high risk and almost impossible to pick winners out of a pool even for established investors. Wins are extremely concentrated, and most positions lose - aka it's more akin to roulette unless you have a distinct advantage. Most "professionals" - aka established super angels like Calacanis or new entrants like Ryan Hoover via weekend.fund - target 30 - 50 investments per "fund" to mitigate this reality.

2 - Successful angel investments, even when they pay off, are usually illiquid for 5 - 9 years. Secondary markets are still being established and unless you manage to invest in Uber it's unlikely that you'll even have that opportunity.

>Angel investing is for everybody

So as with the desperation of crowdfunders retweeting themselves every 15 minutes to the same followers across multiple platforms, instead of requiring those who have looted the most from society to pay their share, the burden of actual financial responsibility must fall on the shoulders of the masses.

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