Smart investors look for market segments where people are already spending many hundreds of millions—or, ideally, billions—of dollars, with a growing field of potential customers.

I know angels (including some who didn't even serve on the company's board) who meet weekly with startup CEOs for executive coaching sessions. And others who facilitate off-site management meetings, provide a much-needed perspective from outside the company, or keep the entrepreneur focused on real-world metrics and financials.

Market diligence covers your independent review of the claims that the company makes regarding the industry into which it is entering. You should verify the market size, competitive players in the market, and industry trends that might affect the company's planned products and/or services roadmap. You do this by conducting online research, talking

Leadership ability. If the entrepreneur is not a ninja-coder-saleswoman-finance wizard, then he or she needs to recruit other people to fill those roles. For a risky startup on a small budget, finding A+ players and then inspiring them to greatness is difficult, and much of the success or failure of the venture will come down to the leadership qual

While there will always be cases where early-stage investors cold-call cool companies whose sites they have happened across, and thereby discover the great success story of the next decade, such instances of serendipity are rare. Many investors will tell you that the majority of their investments are sourced from personal networks they have cultiva

venture capital funds invest in fewer than 1 in 400 companies who pitch them. Let's talk instead about angel investors, who are more prolific, less picky, and individually see fewer opportunities than large venture funds. Tracking data from Gust shows that angels invest in roughly one out of every 40, or about 2.5 percent, of the companies they see

If my convertible note says that it will convert at a 20 percent discount to that $5 million, for example (which, if you do the math, is $4 million), I would seem to have made a very bad deal. Why? Because I end up paying for Company A's stock based on a $4 million valuation, instead of the $1 million it was worth in its early days when I was willi

As investors, we want our entrepreneurs to have what is known as skin in the game; that is, an amount of their own capital serious enough for them to pay close attention to,…but not so much that they will be distracted by having to worry about where their next meal is coming from.

So far, so good. But we're not quite done. The fact is that I was willing to invest in Company A at a time when that other investor was not, and the founders used my investment to make the company more valuable (and therefore got a high valuation from the other investor). It doesn't seem fair that I should bear the early-stage risk, yet get the sam