If you're a new/small angel like myself with a fixed investment pool, what can you do to maximize the # of deals? Two things really. First, make smaller investments--though this isn't great because there's a lower limit where you'll get shut out of deals ($25K is probably the realistic minimum) and, when you do hit, you won't get that much back.
Second, liquidation preference. In my previous post on angel investment scenario planning, I noted that small returns (1-3x) don't influence overall deal pool IRR that much. And that's true in a static scenario. But the real world is dynamic and if you can do more deals you can increase the chances of hits, as noted above. Getting money back through liquidation preference won't move the IRR needle, but it will enable you to do more deals. And to the small angel (me) that is the most important thing.
If you have no idea what liquidation preference is (and you want to know!), check out Brad Feld's two great introposts on the subject. The default term from the Series Seed Term Sheet is essentially "One times the Original Issue Price." That means in an exit event, the investors have a choice to a) get their money back or b) get their equity %. It's an economic choice. If it's a small exit and the equity % doesn't yield as much money as was put in, you'd opt to get your money back; otherwise, you'd opt to get your %.
Tweaks on this model are:
- Get multiple times your money back (e.g. 1.5, 2 or 3 times) in choice a.
- Get your money back first, and then also participate in the distribution of what's left based on your %, which is called participating preferred.
- Participation, but with a cap. In this one you participate up to a limit, like 3x. So you get your money back, and then your % allocation, but if that exceeds 3x your money you have the choice whether to get that or your straight %.
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