Angel investing 101 for engineers

I'm an engineer who’s been dabbling in angel investing for a few years now. Without the help of friends and advisors, it would have been a daunting, overwhelming process. I was inspired to write this blog after a colleague admitted they were mystified by what it takes to invest in a startup as an angel. 

What exactly is angel investing?

Angel investing is the practice of funding early-stage startups with your own money in exchange for equity (ownership stake) in the company. It’s high-risk but can also lead to high financial and personal rewards. For engineers, angel investing represents more than just a chance to grow your wealth—it’s an opportunity to use your expertise to invest in innovative projects, mentor founders, and shape the future of technology.

In this post, I will try to demystify angel investing for other engineers so you feel empowered to help founders and startups who would be thrilled to add you to their cap table.

Here’s a breakdown of angel investing, why it’s worth your consideration, and how to confidently get started.

Why engineers should consider angel investing

Engineers bring a unique skill set and perspective to the world of startups. Your technical background allows you to:

• Identify promising technology: Evaluate the feasibility of products and solutions early on.
• Add strategic value: Offer mentorship on scaling the technology and building robust products and systems.
• Support innovation: Back ideas that align with your vision for the future of tech.
• Diversify wealth: It’s a risky type of investment where you can lose all of your invested capital but comes with a chance of returning multiples on your dollar. Angel investing provides an opportunity for you to invest in something you have a more direct influence on than traditional stock market speculation. 
• Expand your network: Connect with an inspiring community of founders, investors, and other leaders in the startup ecosystem.

Ultimately, angel investing allows you to play a pivotal role in helping startups succeed while gaining invaluable experience in business strategy, leadership, and mentorship.

How to get started with angel investing

When I started down this path, I remember feeling like angel investing was an exclusive club that I couldn’t break into. The truth is, getting started is much easier than it seems—especially if you break it down into smaller, achievable steps:

Step 1: Understand the accreditation requirements: In the U.S., most angel investors must meet accredited investor criteria. This typically means earning $200k+ annually or having a net worth of $1M+ (excluding your home). If you don’t meet these criteria, there are still options like joining certain syndicates or exploring crowdfunding platforms.

Step 2: Educate yourself: Learn the basics of startup financing. Key concepts like SAFE notes, convertible notes, and cap tables might initially seem intimidating, but they’re not rocket science. I will cover these basics later, but there are great resources online—blogs, YouTube channels, and even workshops for aspiring angels.

Step 3: Start small: Your first investment doesn’t need to be huge. Many angel syndicates allow you to participate with as little as $1,000. The goal here is to learn by doing, without overextending yourself financially.

Step 4: Join a community: Networking is everything in angel investing. Join angel groups, attend startup demo days, and connect with experienced investors. Platforms like AngelList are great for finding syndicates and deals while learning the ropes. Feel free to join SignalFire’s developer newsletter to access exclusive networking opportunities in your area. 

How to spot deals

Finding the right deals can feel overwhelming at first, but once you know where to look, the opportunities will start to appear. It’s really about being visible and trying things out. Here’s how you can get started:

1. Tap your existing network: Start with people you know—colleagues, fellow engineers, or friends who are founders. Often, the best deals come from warm introductions. Feel free to join our Developer Network, where we cultivate regional groups and create opportunities for you to meet other engineers in your space.
2. Join angel syndicates: Platforms like AngelList, micro syndicates within Slack or Discord groups can connect you with curated opportunities. Personally I find these groups overwhelming and prefer to network IRL, but I have many friends and colleagues who get a lot out of AngelList. 
3. Attend startup events: Attend demo days, pitch competitions, or tech meetups in your local area. These are great places to learn about early-stage startups and hear directly from founders. You can check out our event list here: https://signalfire.com/developers
4. Develop VC connections: Build relationships with early-stage VCs. While they focus on larger investments, they often come across smaller opportunities that they’re happy to share. The best way to engage with VCs is to show value to their portfolio companies, so if they ask you to meet with a founder, show up and be helpful!

How to evaluate startups

Choosing the right startup to invest in is as much an art as a science. Engineers have an edge in assessing the technical aspects of the product/technology, but there are several other factors to consider before committing capital:

1. The founding team: The founders’ experience, passion, and vision matter. A great team can pivot and execute even when the original idea doesn’t pan out. Look for founders with a track record of building things, learning from failure, and demonstrating resilience.
2. The market: Assess the market's size, growth potential, and competitive landscape. Is the startup addressing a large and growing market with unmet needs? A strong market can provide an opportunity for even an imperfect product to have an impact and grow. 
3. The product: Does their product offer both differentiation and scalability? How defensible is the technology? Can competitors replicate it easily, or does it offer a true innovation or data moat? Scalability matters—an engineering-heavy product that doesn’t scale efficiently may struggle with growing adoption. This is where you should lean on your own expertise. Ask yourself if you really think the product is exceptional and if you or your company would use it. Trust your gut.
4. Traction: Customer interest, early adoption, and revenue signals are excellent indicators of success. In my experience, this is not often easy to gauge at the pre-seed stage, when many founders look for angel investment. Even if a startup isn’t generating much revenue yet, signs of product-market fit—active users, strong retention, or high engagement—indicate growth potential.

The financial side of angel investing: risks & rewards

Understanding the financial aspects of angel investing is critical to managing risk and maximizing potential returns:

1. Typical check sizes: Angel investments typically range from $5,000 to $50,000 per deal. Some investors start with smaller checks through syndicates to gain experience before making larger investments. I typically tend to write $10,000 - $15,000 checks.
2. Diversify your investments: Investing in multiple startups helps you spread the risk. Statistically, only a small percentage of startups will generate outsized returns, so a diversified portfolio increases your potential for capturing rewards. 
3. Be prepared to lose your investment: Unlike public market investments, angel investing is illiquid and highly speculative. Assume that a significant portion of your investments may not return capital, and invest only what you can afford to lose.
4. Consult your financial advisor: It’s a good idea to consult a financial advisor before diving into angel investing.

They can help you:

• Assess your risk tolerance: Determine how much of your portfolio you can allocate to high-risk investments like startups.
• Understand tax implications: Ensure you’re prepared for the tax complexities associated with investments, including QSBS and potential losses.
• Plan your investment strategy: Align your angel investing with your long-term financial goals, ensuring it complements your existing assets.

Final angel investing tips for engineers

I’ll wrap this up by sharing a few final pointers to keep in mind as you start your angel investing journey:

1. Start small and always be learning: Your first few investments should be about learning. Don’t rush things—take time to understand the process, risks, and benefits.
2. Leverage your strengths: Your technical expertise is your superpower. Use it to evaluate startups and also add value post-investment.
3. Be patient: Angel investing is a long game—enjoy the journey. If the investment generates returns, it will be very rewarding.
4. Network like crazy: Make the effort and time to meet other investors, founders, and startup enthusiasts. The more connected you are, the better your deal flow.
5. Common pitfalls to avoid: Angel investing requires discipline and strategy.

Make sure you avoid these common mistakes:

• Over-concentrate on a single deal
• Invest without due diligence or just based on hearsay
• Chase trends or hype

Most importantly, if you’re going to try this, then make sure you have fun. Angel investing isn’t just about money. It’s about contributing to ideas you believe in and supporting founders who inspire you. 

If you’re interested in connecting with other engineers who are exploring angel investing, join our Developer Network. SignalFire is building a space for technical professionals to connect, collaborate, and learn. Whether you’re new to investing or looking to scale your portfolio, we’d love to have you join our community.

🔗 Join the SignalFire Developer Network

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Glossary:

1. SAFE Notes (Simple Agreement for Future Equity)

A SAFE note is an investment contract where the investor provides funding to a startup in exchange for a promise of future equity. SAFE notes are straightforward, often used in early funding rounds, and don’t accrue interest or have maturity dates. Learn More: Y Combinator’s SAFE Primer

2. Convertible Notes

A convertible note is a loan from the investor to the startup that converts into equity in a future funding round. Convertible notes often include interest rates and maturity dates, making them slightly more complex than SAFE notes. Learn more: Convertible Notes overview

3. Cap Tables

A capitalization table (cap table) is a spreadsheet or table that shows the ownership stakes, equity dilution, and value of a company’s shares. Cap tables are critical for understanding how much equity is being offered in exchange for funding. Learn more: Cap Table basics

4. Pro-Rata Rights

Pro-rata rights allow investors to maintain their ownership percentage in a startup by participating in future funding rounds. This is important for angels who want to double down on their winners.

5. QSBS (Qualified Small Business Stock)

QSBS is a tax benefit in the U.S. that allows investors to exclude gains from federal taxes if they hold their shares for at least five years and meet specific criteria. Learn more: QSBS Guide

6. Liquidation Preferences

Liquidation preferences determine how proceeds are distributed to investors during an exit event like an acquisition. They’re crucial for understanding potential returns. Learn more: Liquidation preferences explained

*This should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.