6 Ways to Invest in Startups

6 WAYS TO INVEST IN STARTUPS

If you want the best returns on your money (and you already own Bitcoin and are building your own business) then the next best returns you’re going to get are when you invest in startups.

Startup investing is risky. Ergo, be smart when you invest. There are times when you have to support your friends and their dreams. That doesn’t have to mean you’re writing them checks worth thousands of dollars —but if you believe in them and their business model, you totally should.

Before all that, let’s find out what types of investments you’re legally qualified to make.

Are You Legally Qualified to Angel Invest in Startups?

The kinds of investments you’ll have access to will depend on whether you’re an accredited or unaccredited investor.

Accredited investor just means you’re rich. AKA have a net worth of over $1 million (because that’s the magic rich person number), or have made $200,000 or more for the last two years.

The reasoning behind this is the government wants you to be smart enough to invest your own money without losing it all. If you dumped all your savings into your buddy’s startup and it goes bankrupt two months later, that woudl be bad.

I think that’s dumb and paternalistic.

If you earn your own money, you should be able to do whatever the hell you want with it.

An unaccredited or non-accredited investor is just everyone else. The poors. AKA the people who miss out on the crazy good startup opportunities—until now.

Go ahead and skip the next section if you’re unaccredited and want to get in on the action.

Accredited Investor Options

If you’re accredited, you have all of the options on the table as well as those of an unaccredited investor below (so read them, too).

6. Angel Investing

Basically, you’re free to invest directly in a startup. Get a lawyer to help you with this, especially if you’ve never done it before. Make sure you get one familiar with the law around startup equity so they can watch out for the traps like dilutionary shares and other watch-outs.

Or, you could keep it even simpler and give your money to a venture capital fund.

5. Venture Capital (VC)

The more diversified way to invest in a portfolio of startups is through venture capital. VC is like a mutual fund, but startups instead of stock.

You’ve gotta be an accredited investor for this one, too. Bad news, normies.

If you do invest, you’ll probably have something like a 10-year lockup. Your funds release when the startup has an exit—AKA gets bought out or IPOs.

Probably the most successful venture fund ever is Sequoia Capital. Their successes include Apple, Google, YouTube, Reddit, Zoom, AirBnB, Zapier, MongoDB, and tons more.

These guys are winners. If you want to play with them, get accredited.

Or Be a Maverick and Start Your Own

If all of this is interesting, and you have a background in startups or finance, why not simply start your own investing fund? If you plan on doing a lot of startup investing, it can be worth it even if you’re just investing your own cash.

In fact, creating a family office is a classic move of rich people. It’s a very common story for one generation to get rich running a business, have an exit ,and then the next generation wroks full time simply to steward teh family wealth.

Non-Accredited Investor Options

It’s okay if you’re not rich yet. You’ve still got a couple of sneaky options allowing you to get in on the ground floor of a promising operation.

It will probably be with people who you’ve met personally. You very likely will not find these online (unless you’re using Twitter to network, which is totally valid).

Otherwise, you can throw in on investing platforms. That’s less fun (for me) but plenty of people do it , and have been doing it for years.

4. Friends & Family Round — The Best Way Newbies Invest in Startups

Stop.

If you’re just skimming this article, then THIS IS THE SECTION YOU WANT TO READ.

Continue.

Friends and family rounds are the most fun. This is where you’ll get your chance to write tiny checks of less than $10,000.

Generally, you can’t invest in startups as a non-accredited investor. However, Rule 506 of Regulation D means you can have up to 35 non-accredited investors invest in your startup. That’s plenty of people for a friends and family round.

You don’t need a ton of money. You do need a high-quality network of people who are pursuing investable, scalable startups.

Apparently including non-accredited investors can create legal headaches later—but if they are what you need to get off the ground, then just do it and deal wit hit later. If the options are (1) you don’t do it, or (2) it’s hard, pick hard every time.

The other options is Rule 504 of Regulation D. This lets startups sell up to $5,000,000 in securities in a 12-month period. This used to be 1 million and it was upped because it takes more startup capital these days. Also inflation.

There is no restriction on this in terms of accreditation—but the startup owner must have already known the contacts, and the buyers have to hold their shares for at least 6 months.

It is very hard to sell your shares in a startup anyway, so that honestly shouldn’t be a problem. Startup shares are hella illiquid.

What this means is you don’t need a ton of money. You do need a high-quality network of people who are pursuing investable, scalable startups.

Don’t Bet the Farm On Your First Check

A “friends and family” round typically means you’re investing in someone who is building a prototype or are otherwise trying to validate their idea.

It should not take much money to do this.

If you’re a small-time investor then this is prime time to get in. Minimum check sizes here will probably be $1000. That’s the smallest check I’ve ever written for a startup (back when I was making little and living lean). For my specific situation, I wrote the smallest check. This was very early in my job history. I’m guessing I tied for smallest check with another investor—but I didn’t have visibility into the cap table.

My investment was a convertible note, so essentially a loan which could could turn into equity, which is pretty standard at startups these days. It also didn’t leave the founder on the hook if their startup went under (which it eventually did).

Need less to say, this area is complicated. I am not a lawyer. This is not legal advice. Do a ton more research before investing yourself.

And then hire a lawyer.

3. Equity Crowdfunding & Investing Platforms

The JOBS Act (specifically titles III and IV) changed the crowdfunding game. Now the plebs can invest in startups en masse.

There are rules, but they just keep you from dumping your net worth into any one venture.

Heads up: this is NOT for using a platforms like Kickstarter.

Kickstarter can be a great way to get funding and publicity for your startup at the same time (publicity is honestly an even better opportunity there than money). But you do not receive equity on Kickstarter.

I repeat:

If you’re trying to invest in startups, Kickstarter is not how you do it.

Now, there are a couple platforms you can use to give you what you actually want if you’re trying to to crowdfund a startup for equity.

Equity Investing Platforms

When you search for “startup investing platforms” these are what usually show up. You do get equity for this, often in conjunction with Regulation D (discussed above)

  • AngelList. The OG of startup investment platforms. Anyone can list their startup here.
  • MicroVentures. Vetted startup investment opportunities.
  • SeedInvest. Vetted startups.
  • WunderFund. Mostly small businesses, not “tech startups” per se.
  • StartEngine. Both tech and small business opportunities. Backed by “Mr. Wonderful” of Shark Tank.

There are probably a dozen others.

Why the hell do they all have to follow the same StartupName pattern? Because tech people aren’t great marketers.

Or they’re all brilliant marketers and this is some kind of formula which consistently works.

2. Become an Advisor to the Startup

If you’re the kind of person who has helpful connection, advice, and can arrange deals for your friends’ businesses, you need to be collecting advisor equity.

Basically a contractor-mentor who gets paid in equity.

Equity per advisor per startup tends to run around 0.25% to 1%. One percent tends to be the median, and whatever equity it is tends to vest over a couple years to incentivize you to stick with the business.

Here’s a screenshot from someone I know on LinkedIn (blurred out the company’s names for anonymity’s sake). This person is in their 60s, has experience starting and leading multiple businesses, and is plugged into their city’s startup ecosystem.

They are harvesting the fruits of their decades of labors via collecting equity as an advisor to multiple startups. Board memberships and startup advisor roles are both often equity positions, and all you have to do is an occasional zoom call.

There are other hidden benefits to becoming an advisor, too.

  • Learning about a lot of different industries
  • Building out a network that can last you years (even if a startup fails, if the person is valuable, they’ll remember how you helped them before)
  • Networking with other advisors, who will inherently be industry experts and leaders themselves
  • You get access to wide number of startups. In general, I don’t love tons of diversification, but if it’s a startup (and isn’t your own) it’s probably necessary.

Candidly, 0.25–1% equity is not a huge amount. Most startups fail, and of the ones that survive, it probably give you modest returns. However, one could turn into a unicorn and pay you well, and compared to the amount of work you’re giving, that is totally worth it.

1. Invest in Startups…Under the Table?

Why the heck do I list this as an option? Because it happens all the time.

I am not making a recommendation. I really really am not. This is how people lose friendships. Or solidify them forever. These people become your day ones if this happens and goes well.

If you’re writing a five-figure check or more, don’t do this. Please.

In general, you’re only supposed to invest what you can afford to lose. I don’t believe that, because like death and taxes, inflation comes for us all.

Nevertheless, this one is hella risky.

So Much Info. Where to Start?

Start with this great little 2×2 matrix from Maia Bittner:

A quick explanation for each of these:

  • AngelList and Republic are open platforms where startups are seeking investment
  • Fantasy angel is just her term for paper trading on startups you would invest in if you could. This builds your reputation and gives you access to people later who think you’re smart.
  • Tiny checks is exactly that. Writing small (less than $10,000) checks into early stage startups
  • Startup advisor is the classic one that is the safest one here, and consequently the one you need to be most qualified for

Her conclusion is that tiny checks are the best option out there giving you learning opportunity, reputation building, and private company equity.

All Your Investing Options

You’ve got:

  • Angel Investing (accredited only)
  • Tiny checks—even when you’re unaccredited
  • Acting as a an advisor
  • Equity crowdfunding
  • Syndicate Investing
  • Under the Table (uhh, don’t do this)

Don’t know where to start? Simple two steps to follow.

  1. Start earning money
  2. Start talking to startup founders

To earn money, you need to know a lot about something. Then you need to meet other founders.

My suggested way to do both? Start a business yourself.

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