Because investing involves so much judgment, it can be very difficult to know what the right amount of diligence is and how to do it, identify key risks, develop the investment thesis and recognize “what you have to believe in order to invest”. The range of due diligence that I perform on my angel investments varies greatly from investment to investment. I don't have a simple approach because every startup is different and every offering is different. And if I syndicate an operation, I feel that I have a fiduciary responsibility to thoroughly investigate the operation and the startup, and I tend to do more for them than when I write a check on my own.
An angel investor will want to analyze your capitalization table to ensure that it's not already too diluted. Remember that every angel investor has their own process for performing due diligence in a startup, but there are a few basic aspects you can focus on to prepare. In that case, you might want to do it before going to an angel investor to show that you're serious about protecting your company's intellectual rights. This step varies between investors, since there are no universal criteria for what each investor will want to see.
The ten subject areas above are guidelines for the areas that your prospective angel investor can cover as part of their due diligence process. After all, you need to make the angel investor feel comfortable enough to go ahead and write that check. Jonathan Hung is one of the most active angel investors in Southern California; his mission is to drive value creation in each holding company. Angel investors want to see a team with diverse skills, ranging from product development to sales and marketing.
Then, an angel investor will analyze your possible sources of income and will think about what those sources could be and how your company can grow. Your angel investor probably won't ask you to see the source code of your product, for example, but you'll want proof that you have a right to the intellectual property you're developing. When angel investors like me cut entrepreneurs' paychecks, it often involves a multi-step process. Your angel investor probably won't refuse to cash you a check because you didn't file a patent for your intellectual property.
If you have made significant investments in the past, be prepared to explain them in more detail and assure the angel investor that your position will not have the same level of dilution.