# Angel Investing: Check Sizes

If I were to go back in time and give myself advice on starting out as an angel investor, perhaps the first thing I’d say is: “pick a check size and stick with it.”

### Negotiating for allocation

Common wisdom is that angel investors don’t get to negotiate. You’re a small part of a larger funding round, the terms of which are set via negotiation between the founders and the lead investor.

That’s almost true. Conversations between founders and angels do typically focus on determining mutual fit in a strictly binary sense — does the angel want to invest and does the founder want them on the cap table?

The discussion of “how much?” almost always happens after both sides say “yes.”

This is either by necessity because the negotiation with the lead investor is ongoing or through savvy on the part of founders who are deferring until they have a complete picture of the aggregate demand for their round.

A subtle negotiation does proceed when the founders circle back to finalize allocations for angels. If demand is high, the founders will push for getting your help in exchange for as little cash (dilution) as possible. If demand is low, they will push for getting as much cash as possible1.

If you don’t follow a basic tenet of negotiation — start with a concrete goal in mind — and state it with conviction early in your conversations, you’ll eventually find yourself with more money allocated to the weaker companies and less money allocated to the stronger companies2.

### Making better decisions

Lowering the check size is a tempting escape hatch when you have nagging concerns about the company but don’t have the confidence to say “no” relative to the fear of missing out or upsetting the founders.

And it’s tempting to “go big” when you have some key reason to be extra confident. Perhaps you know the founders are extraordinarily productive because you worked together in the past. Or you deeply understand the customer pain point.

What you’ll come to realize over time is that the former scenario should always yield a “no” and the latter scenario is the only path to a smart “yes.”

But calibrating this threshold is a never-ending process that requires careful reflection over time as you see how companies turn out.

Your mental model for investing will converge a lot more quickly if you’re trying to hit the mark on a simple decision – should you have invested or not? – rather than a continuous range of check sizes.

### Avoiding regret

I’ve encountered two forms of regret related to check sizing.

The first is the regret of investing too little in a company that turns into a home run but doesn’t have a home run impact on your personal finances. Investing $10k instead of$50k leads to a difference of a whopping \$4m in a 100x outcome.

The second is the regret of investing more than usual in a company that ends up turning especially sour3. The sting of a larger than usual loss combined with painful circumstances makes it harder to brush off and move on.

The sweet spot is somewhere in the middle — enough to feel great if the company is spectacularly successful but not so much that you hold a grudge against the founders in a complete disaster.

### Diversifying

Angel investing is a fun hobby for the already fortunate. And most people get started for reasons beyond simple financial gain.

But few of us are so fortunate that we can keep writing checks indefinitely without any hope of returns.

If you invest large amounts in a few companies and need to pause for a while to make more money, odds are you won’t resume because the first crop will all turn out to be duds.

If you invest small amounts in many companies quickly, odds are you end up in the same place because you won’t have had time to improve your decision making and deal flow.

Angel investing benefits tremendously from both company and time diversification. A consistent check size is a useful tool to pace yourself in building a portfolio.

Here’s a simple framework: pick a target allocation over some time horizon, e.g. 10% of your current liquid net worth over the next 3 years. Divide the dollar allocation by the number of months in the time period. That’s your check size.

Written August 2020

Footnotes:

1. Nothing about this is nefarious or secret — just market forces.

2. At least as judged by the market at the time of the financing.

3. Once in a rare while founders turn out to be crooks or maliciously greedy. I don’t mean that the company fails to find product-market-fit and then shuts down or gets acquihired. That’s the modal outcome and you should expect it to happen a lot.