Any advice? What to look for in the deal? What to avoid? How to not get screwed out?
Otherwise, pg has an article which better articulates pieces of advice I wanted to give like "start being a source of dumb money attached to someone you trust who did this before." See here: http://www.paulgraham.com/angelinvesting.html
Do you know if it's possible to have a clause that says something along the lines of "If you guys decide to up and quit I get your site and tech?"
You seem to be providing a small seed round so if they are successful, prepare to be diluted significantly (or forced to pay more to maintain equity portion). There are many rounds to come (Best case scenario).
The worst case scenario is that the money evaporates along with the startup. 20% of nothing is still nothing, unfortunately.
With regard to your acquisition of the site and technology - consult a lawyer. If the startup is incorporated already, then you will have to do some paperwork and you can ask for clauses that grant you I.P. rights if the company goes under.
A hands off approach would be nice, but you have to be careful. On the one hand meddling too much will interfere, but on the other hand doing nothing is typically a fast way to lose your money.
Best of luck if you decide to invest. If you have any other questions shoot me an email (in my profile)
> I'd like to avoid getting screwed
Those are two mutually-exclusive desires. If someone else is running the show and you aren't in the loop, then they will almost certainly be able to screw you if they choose to. At the very least, to avoid being screwed you'll need to be able to make a credible threat of suing them if they choose to screw you. The more hands-off you are the less credible that threat will be.
Investing is like any other job. There's no free lunch, no easy way out, and the more work you do the more likely you and the company are to succeed.
I note your point about being hand-off. It's something I didn't consider earlier. The question of "what if they decide to quit/change direction to one that sucks?" is something I missed and will consdier further.
The main issue I have is with me taking 20% of the current company, what are the methods I need to look out for that future investors can screw me down to 0% equity?
You shouldn't be angel investing, though - not if you'd actually consider suing founders because they might change the direction of their company to one you disagree with, or because they might decide to wind down the company should they fail and be unable to raise more capital. Both of those things are pretty normal, and the way angel investors deal with them isn't to come up with non-standard contractual terms, it's to have a portfolio of many angel investments, so their risk is distributed. If you're only going to be investing in one, you've just got to accept that you've got a very high chance of losing 100% of your investment. Founder malfeasance is the least of your worries - you'll lose it because most companies fail despite their founders' best efforts.
All you're going to do here is end up introducing non-standard terms into your investment paperwork which are going to scare away future investors and make the company you're investing in less likely to succeed.
That last sentence is an eye opener and I will now avoid non-standard terms. Is there a list/source of some expected standard terms for startup investment?
Lastly, do you know of any good sources (other than the PG article mentioned by Patio1 above) on the subject of angel investing? Any good books/sites?
http://www.gabrielweinberg.com/blog/2010/06/how-to-learn-abo...
I should probably step back from what I said earlier and stress that there's not one canonical set of 'standard terms' - there's just terms that are typical and terms that are rarely or never seen. Unless there's a compelling reason, I'd keep things typical.
I'd also Google and read up on convertible debt, which might be a good option. There are pros and cons to convertible debt, but the associated legal costs of doing convertible debt are generally lower, so a big chunk of the money you're investing won't immediately get eaten up by lawyers. You can't avoid legal bills - whatever route you take, the company will need a lawyer with relevant experience. But you can minimize the cost.
http://www.avc.com/a_vc/2010/03/standardized-venture-funding...
First, they can't screw you down to 0%. Your shares are always your shares. You can be diluted down to epsilon, but not to zero. Also, the board has a legal fiduciary responsibility to act in the best interests of the shareholders, so there are limits to how capricious they can be. At the very least they have to be able to provide themselves with plausible deniability that what they are doing is in your interests.
There are two legal mechanisms for avoiding future dilution. One is to have a class of non-dilutable stock, but that is hardly ever done. It's a huge red flag for future investors. The other is to have a ride-along clause that gives you the option to participate in future rounds to maintain your current percentage share. It is rare NOT to have this clause, but the problem with that is, obviously, you have to be able to come up with the cash.
But by far your best option, since your stake is so high, is to take a board seat. Being on a board is all that time consuming, and it looks good on a resume too.
What stops founders from theoretically taking the money and run (shut down company, keep the money left)?
But most larger investors might insist on baord appointments and a reputable CFO, and that's without the legal stuff.