Questions to ask a founder before you invest (for first-time angels)

The short answer: three conversations, three kinds of questions

A founder has just sent you a deck, a friend says the round closes in two weeks, and you have never written a check into a startup. You open a list of "50 questions to ask before investing" and realise you cannot ask a founder fifty questions in a 30-minute call without it feeling like an interrogation. You do not have to. Good angels spread their questions across the deal: understand first, test second, sign last.

It is worth the time. In the largest study of angel exits at the time, Robert Wiltbank and Warren Boeker surveyed 539 angels in North American angel groups for the Kauffman Foundation and the Angel Capital Education Foundation. The median angel spent 20 hours on due diligence before investing. Exits where the angel spent more than the median returned 5.9 times the money overall, against 1.1 times for those below it; 65% of the low-diligence exits returned less than the money invested, against 45% of the high-diligence ones. The study is from 2007, covers only angels in groups and shows a relationship, not proof that hours cause returns. The direction is still clear: the questions you ask, and checking the answers, matter.

The same study is also a reminder of the base rate: 52% of all the exits it recorded returned less than the capital invested, and only 7% returned more than 10 times. Ask good questions, and still only invest money you can afford to lose completely. This guide explains how investors usually work; it is not investment, legal or tax advice.

• Conversation 1, understand (30 to 45 minutes): who the customer is, what problem hurts, why this team, what the money is for.
• Conversation 2, test (after you have read the material): the evidence behind the two or three claims the deal depends on, customer calls and references.
• Before signing, the terms and the paperwork: the instrument, the cap, who else is in, the cap table, founder vesting and IP, ideally reviewed by a lawyer.

Before you ask the founder anything, ask yourself four questions

The first questions are for you, because they decide which founder questions matter. An angel who knows payments well will spend the first call on very different things from someone investing in a friend's company out of loyalty.

In the United States, many early startup rounds are private offerings limited to "accredited investors". The SEC's investor bulletin explains why: these offerings do not have to make the disclosures a registered offering makes, and you could lose your entire investment. For an individual, accredited broadly means income above $200,000 (or $300,000 with a spouse or spousal equivalent) in each of the last two years with the same expected this year, or net worth above $1 million excluding your main home, or holding a Series 7, 65 or 82 licence in good standing. Y Combinator's SAFE page says SAFE investors should be accredited. If you are not, US Regulation Crowdfunding lets anyone invest through online platforms run by SEC-registered funding portals or broker-dealers; if you are not accredited, how much you can put in over any 12 months is capped, based on your income and net worth. Outside the US, the rules are different in every country, so check your own regulator or ask a lawyer before you commit.

• Could I lose this whole amount without it changing my life? If not, stop here.
• Am I allowed to invest in this kind of round where I live, and as what (individual, through a company, through a syndicate)?
• What do I actually understand? Your field is where your questions will be sharp and where you can help after the check; Wiltbank and Boeker also found industry expertise related to better returns.
• How many startups will I back? A single check is a bet on one company, not a portfolio. Decide your check size and how many companies you want to back over the next few years before the first meeting, so one founder's enthusiasm does not set it for you.

First meeting: eight questions that show you the business

In the first conversation you are collecting the founder's story in their own words, not checking it yet. Ask open questions, let them talk, and write down the claims you will want to test later. A useful answer is specific enough to check: "small businesses need this" is hard to test; "returns managers at mid-size online shops spend hours a day on refund paperwork, and three of those shops pay us monthly" gives you a customer, a cost and someone to call.

Use the question bank below as your notes page. The "listen for" column is what a strong answer tends to contain; the "ask for later" column becomes your list for the second meeting.

FIRST MEETING QUESTION BANK

1. Who is the customer, exactly, and who pays?
   Listen for: a named type of customer and buyer, not "everyone"
   Ask for later: 3-4 customers or prospects you can call

2. What is painful enough that they need this now? What do they do today instead?
   Listen for: today's workaround (spreadsheet, agency, doing nothing) and what it costs them
   Ask for later: the interview notes or emails behind it

3. What has already happened outside the deck?
   Listen for: users, pilots, paying customers, a waitlist, or an honest "just the idea so far"
   Ask for later: the numbers, with definitions and dates

4. What did you learn from customers that changed your plan?
   Listen for: a real before-and-after (changed buyer, price or product)
   Ask for later: what they stopped doing because of it

5. Why you? What does this team know or have that others don't?
   Listen for: earned insight, access to customers, a technical ability
   Ask for later: people who worked with each founder

6. Who does what, and is everyone full-time?
   Listen for: clear ownership of product, tech and sales; who decides in a tie
   Ask for later: the founders' agreement and vesting (section 07)

7. How much are you raising, on what terms, and what will it pay for?
   Listen for: an amount, an instrument (SAFE, note or priced round), a milestone
   Ask for later: the term sheet or SAFE, the cap table, who has committed

8. What would have to be true for this to work, and what worries you most?
   Listen for: a founder who names the riskiest assumption without being pushed
   Ask for later: the evidence for that one assumption

Ask about the founders without making it personal

Most early rounds are a bet on people, and at this stage there may be no revenue at all: in the Wiltbank and Boeker data, 45% of the companies had no revenue when the angels invested. So team questions matter, but "why should I trust you?" helps nobody. Ask about situations instead of character, and listen to how co-founders answer when the other one is in the room.

• "Tell me about a recent disagreement between you. What did each of you think, and how did you decide?" Founders who cannot name one have either not worked together long or are not telling you.
• "How did you meet, and how long have you worked together?" A team that has shipped something together before has already passed a test you cannot run in an hour.
• "What is the hire or skill you are missing, and when does it start to hurt?" This shows self-awareness and what part of your money goes to people.
• "Who else is working on this, part-time or as an advisor, and do they own shares?" Advisors with equity and part-timers should show up later in the cap table.
• "What do you want from an investor besides money?" Their answer tells you whether you are a fit, and whether they have thought about it at all.

Second meeting: turn claims into evidence

Before the second conversation, reread your notes and circle the two or three claims the whole deal depends on. That is where your hours go. You do not need to check everything; you need to check what would make you walk away if it were false.

Talk to customers. Holloway's guide to angel investing suggests a couple of hours with three or four paying customers, if the company has any, and notes you may learn who the real competitors are in the customer's eyes. Founders sometimes hesitate to share customers because they do not want to look like they need money; the same guide suggests agreeing a short, positive script with the founder first. Then ask each customer the questions below.

Call people who worked with the founders, including at least one the founder did not suggest, such as a former colleague you find yourself. Ask what the person is like under pressure and whether they would work with them again. Ask to see the numbers behind every chart in the deck: what "active user" means, where revenue comes from and how much cash is left each month.

• How did you hear about the company or product?
• What do you use it for, and what problem does it solve? What is that worth to you?
• What were you using before, and what else did you consider?
• Does it meet your expectations so far? How is the team to work with?
• Are you actually paying for it?

Questions about the round, before you sign anything

Many first angel checks go in on a SAFE (simple agreement for future equity), a short contract created at Y Combinator in 2013. Y Combinator's own explanation is the clearest primary source: a SAFE is not debt, has no interest and no maturity date, and is not shares yet. It converts into preferred shares automatically when the company raises a priced round. The valuation cap is the highest valuation at which your SAFE converts, and on YC's post-money SAFE your ownership is your investment divided by the post-money cap. A discount gives you a lower price than the next round (YC says commonly 10 to 20%). An MFN SAFE has no cap or discount and takes the terms of a later SAFE.

Worked example: you invest $25,000 on a post-money SAFE with a $10 million cap. Your ownership at conversion is $25,000 ÷ $10,000,000 = 0.25% of the company, before later rounds dilute everyone. If the company is acquired before converting, YC's cap SAFE gives you the greater of your money back or what you would get as if it had converted; if it shuts down, you are owed your purchase amount back, after debts are paid, which in practice may leave little or nothing.

Some rights are not in the SAFE itself. Pro rata rights, the right to invest more in the next priced round to keep your percentage, sit in an optional side letter, and YC tells founders it is fine to refuse them to small investors. Ask instead of assuming.

• What exactly am I signing: a SAFE (which version), a convertible note or shares in a priced round?
• What is the valuation cap, and is it pre-money or post-money? Is there a discount or an MFN?
• How much is the round, how much is already committed, and who leads it?
• Are there earlier SAFEs or notes, and on what caps? They convert too.
• Do I get a pro rata side letter or information rights, or will I just get updates when the founder sends them?
• Has the board approved issuing these SAFEs? YC's guide says the board must.
• Before money moves: have a lawyer who works with startups read the document. The tax treatment of your investment depends on your country and situation, so ask an accountant too.

The documents to ask for (and what each one tells you)

You do not need a data room for a small first check, but a handful of documents answer questions a founder may not think to raise. The Angel Capital Association's due diligence question list for angel groups covers these areas, from founder vesting to litigation. Ask for them politely and early; a founder who has them ready saves you both time.

• The cap table, fully diluted: who owns what today, including options, earlier SAFEs and notes. It shows how much of the company the founders still own and whether they keep a strong enough incentive.
• The founders' agreement and vesting: is founder stock vested over time? Without vesting, a co-founder can leave in month three with a large stake.
• IP ownership: are the code, designs and patents owned by the company, through employee and contractor agreements, and not by a founder personally or a previous employer?
• Earlier funding: who invested before, how much, and on what terms.
• Litigation and promises: any lawsuits, threatened claims or large commitments that you would not see in the deck.
• The company itself: where it is incorporated and that it is in good standing. This affects which documents are used and which lawyer you need.

The questions founders will ask you

A good founder is checking you as well. Have short, honest answers ready before the first call; it makes you easier to say yes to, and it saves everyone time.

• How much do you usually invest, and how quickly do you decide?
• What can you help with besides money? Name your field and one or two kinds of introduction you can really make.
• How involved do you want to be? Wiltbank and Boeker found that angels who interacted with their companies a couple of times a month, through mentoring, introductions or monitoring, saw better outcomes. Say what you will actually do.
• Will you invest again in a later round? If you do not know, say so.
• Who else do you know who might invest? Only promise introductions you would make anyway.

Decide on one page, and reply within a week

After the second conversation, write one page before you talk to anyone else about the deal. The point is to separate what you saw from what you were told and what you hope. Then pick one of three answers, and send it within about a week. A quick, specific no lets the founder move on and is far more useful to them than silence.

DEAL NOTE (one page)
Company / founders:
What they do, in one sentence:
The one claim this deal depends on:
What I saw myself (customer calls, numbers, documents):
What I was told but have not checked:
Biggest risk, in my words:
Terms: instrument / cap / discount / my amount / my ownership if it converts at the cap
What I can do for them after the check:
Decision: CONTINUE / PASS / WAIT FOR (named milestone, e.g. "five paying customers")
Why, in one sentence:

PASS EMAIL
Hi [name], thank you for the time and for sharing [specific thing]. I am going to pass on this round. The main reason is [one honest, specific reason]. If [milestone] happens, I would be glad to hear from you again. Good luck with the raise.

Where to meet founders to ask these questions

The questions work best when the founder in front of you is building something in your field. Most angels find those founders through a mix of channels, and none of them replaces your own checks.

• Founders and operators you already know. Ask them who is raising in your field and for a short introduction to one company, not a forwarded list.
• Angel groups and syndicates. A lead investor does much of the diligence and you learn by watching how they ask; still ask your own questions.
• Accelerator demo days and small meetups. Fewer pitches, more conversations afterwards.
• In the US, Regulation Crowdfunding platforms if you are not accredited, within the yearly limits.
• A network where founders and investors find each other by what they offer and what they need, such as Solution (next section).

Meet founders in your field on Solution, and keep each deal in one place

For a first-time angel, the hard part is often not the questions but meeting enough founders in the field you understand, and then keeping track of them. That is what Solution is for here. Founders, investors, advisors, developers and executives are in one room, and every Smart Connections suggestion comes with the reason two people were put together, so a first conversation can start from why you fit instead of a cold pitch, and you already know what to ask in the first meeting. Sections have an end and there is no endless feed: find the one founder worth a first call and get on with your day.

Here is how to set it up with this guide:

• Create a profile with the Investor role and fill in your stage, field, place, check size and a short thesis, the answers you wrote in section 02. Founders see it on your profile, and Smart Connections uses it to match you.
• Answer the short Smart Connections questionnaire (four taps on how you work). Smart Connections suggests people and says why each one fits: what you need, how you work and where you are.
• Before a first call, read the founder's startup page: it shows what the startup does, its stage, what it is raising and the roles it needs. That covers part of questions 1 and 7 before you meet.
• When a founder shares a pitch deck with you, or a member introduces a startup, it lands in your Investor Desk as a new deal, so the companies you are weighing sit in one workspace with your holdings and updates.
• After you invest, the updates the founder posts on the startup page (milestones, funding, news) show up in the Investor Desk of the investors who backed it, so you stay up to date between the calls you promised in section 08.
• Follow the startups you are watching, and believe in the ones you have real confidence in: the founder gets a notification saying who believes, and other signed-in members see it on the startup page.
• Free and Membership, plainly: creating a profile, exploring people and startups, following them, your first three messages and seeing that Smart Connections has picks for you are free. Membership lets you message anyone directly, see who Smart Connections picked for you and why, use the Investor Desk, appear in the directory and join events.