Things I've Learned in Angel Investing

I've helped friends start three companies so far, and helped another continue on for a bit before losing everything I put in. Here's a few things I've learned in my informal angel investing adventures.

1. Only invest what you can afford to lose.

   As with all investing, really. Investing in a single company is very risky; it's putting all your eggs in one basket. Investing in a startup is like putting all your eggs in a basket made of a new experimental material with properties unknown. It might be a nice titanium alloy, or it might end up being a new origami pattern that disintegrates in a bit of rain. It can be a decent place to put truly spare cash, though.

2. Put the terms in writing.

   There will be confusion on anything not in writing, and even then there could be some. Think the arrangement is trivial? Someone will remember it as an investment, and someone else will remember it as a loan. The small business owner is going to forget the need to pay out quarterly for estimated taxes (though, this isn't a problem until you are in a position to have to pay them -- earning so much on the side that you surpass your regular employment's withholding, or retired and not withholding anything). Questions will arise when new investors want to join. Does the owner get a salary paid off the top? Better to just write it down and amend things when new issues come up and are decided.

   Do as I say, not as I do, on this one.

3. Be wary of replacing a departing investor.

   If you are being approached to provide capital to replace some that a departing investor pulled out, extra caution is warranted. Investors can cash out for plenty of legitimate reasons (retiring and buying a summer home, for example). But, it could also be a sign that they saw something wrong. If it's been long enough for an investor to pull out, it's probably an established business. That means they've been in business for awhile and have not built up enough reserve capital in all that time. It's an increased risk, for sure.

4. Be wary of contributing only a portion of initial startup costs.

   Let's say a company needs $100,000 to start up, but you can only afford to invest $50,000. Include a clause to cover the possibilities. Either they don't raise enough to start at all, in which case you want to make sure you get back whatever money you've already given them, or they find a cheaper way to start up. But in this latter scenario, the likelihood of needing to raise more capital increases, and you need to make sure you're fine with the consequences. You're going to have your share diluted, or you need to include a clause about where that dilution comes from, up to their initial capital raise goal, as an example. Or they fail to raise more capital and go out of business.

5. Be prepared to do your taxes late.

   K-1s almost always arrive late. The more businesses that you invest in, the higher the probability you will have to file an extension. Pretty much always, in my experience.

6. Feel good about it.

   This has two parts. Before you pull the trigger, have a generally good feeling about the investment. Trust your gut to whatever extent you normally do. Afterward, don't stress too much. If all else fails, you helped employ one or more people, and you helped someone try to achieve their dream. And since you followed #1, you can afford to fail economically. Silver linings!

Porn is Fascinating

Porn is fascinating. The porn industry even more so. Honestly, why does it still exist?

Robert A. Heinlein, in Glory Road, writes:

"Any commodity is certain to be sold—bought, sold, leased, rented, bartered, traded, discounted, price-stabilized, inflated, bootlegged, and legislated—and a woman's 'commodity' as it was called on Earth in franker days is no exception. The only wonder is the wild notion of thinking of it as a commodity."

...

"Not only is whoring unknown elsewhere, but its permutations are unknown—dower, bridal price, alimony, separate maintenance, all the variations that color all Earth's institutions—every custom related even remotely to the incredible notion that what all women have an endless supply of is nevertheless merchandise, to be hoarded and auctioned."

It strikes me as even more strange that recordings of sex would be a commodity. Especially in today's world, where every exhibitionist in the first world can get easy access to multiple cameras and an Internet connection, why are there still people who pay for porn?

I can at least somewhat understand the popularity of camgirl sites - there's the possibility of some sort of emotional connection with the chatting, the ability to direct the action and have some fantasy fulfilled, and every moment produces new content. But it still doesn't make sense to me for recorded pornography. Perhaps it really is as simple as the production value. After all, there are people who will buy a Blu-ray even though they already own the DVD. Surely there's some well-lit, high definition amateur porn out there that would satisfy the lust for quality, right? Clearly, this demands additional research.

Rethinking My TV Watching Process

Previously, I had decided against watching TV shows until they were established. I amended that (in my head, at least) to mean I wouldn't watch TV shows until they were over. My reasoning was simple: I would binge and get caught up on a show only to lose track of it at some point during the next season. At that point, I would feel like I had to catch up from the beginning again in order to resume watching, thereby making the original catching up pointless.

I stand by that reasoning, but have made a few exceptions this year. First, I decided to watch Marvel's Agents of S.H.I.E.L.D. (IMDb, hulu) live in order to support Joss Whedon and because I thought some of the material might get incorporated into upcoming movies. Then, because Trophy Wife (IMDb, hulu) premiered right after while I was making dinner, and it had Bradley Whitford, I figured I might as well keep current on that one as well. Then I figured I should support Karl Urban and watch Almost Human (IMDb, hulu). As you might have guessed from my linking, I keep up with them on hulu. For one, I can watch whenever I want, up to five weeks later. I'm also guessing that my view is actually tallied this way. Of course, my original position seems to be justified: Both Almost Human and Trophy Wife are unlikely to be renewed (see the end of any recent article here). My more strict position of not watching a show until it's over was also recently reinforced. I caught up with How I Met Your Mother because I loved it so much I kept watching another episode. So, I caught up well before my original target date of the end of Season 8. Then, it surprisingly got renewed for another season, and I've lost track of it.

Why am I rethinking my process, then? Because I just finished watching all five seasons of Chuck (IMDb, Netflix) over the past two weeks. Since I finished it a couple days ago, I've been in a bit of a funk. While I think Chuck ending has hit me harder than the conclusion of most other series (both because of the way Chuck ended and because it was so good overall), I think a lot of it has to do with binging on a show so intensely. When you watch multiple episodes per day, effectively spending more time with the characters than you would a significant other, and then it's suddenly over.... It is very much like a breakup. Especially when there is a strong romance involved in the show. I think this is why Scrubs' ending (not counting the medical school spinoff) was also so hard for me. For the record, the strong romance I refer to in that show is between JD and Turk - all the other ones are comparatively trivial.

Perhaps the answer is related to the problem. Maybe I just need to only binge on a TV show with a friend. This has two ways of solving the problem. First, it's quality time spent with a friend, and that friend remains around after the last episode to form a support group for the breakup we both just suffered. Second, scheduling concerns will naturally slow the pace of watching, hopefully reducing the intensity of my attachment to the show. Does it sound like a good plan?

Third Refinance

Yesterday, I closed on my third refinance. This is my fourth loan for the house in just over 6 years of owning it (http://eis271828.blogspot.com/2007/05/house-closing.html). I opted for a 15-year loan at 3.000% interest, which was the no-cost refinance rate. My out-of-pocket costs were #3115.86, which included $1549.21 in principal reduction, because I wanted the new loan to be a nice round $200K, and the customary prepaid interest and escrow pre-funding. I should get $1,433.34 refunded from my old escrow in awhile. Not too bad.

The 3% interest rate is lower than my estimated long-term rate of inflation (http://eis271828.blogspot.com/2010/08/annualized-inflation.html), which means I am borrowing money for free! The principal portion of my payment is also hugely higher than the interest portion, which makes me all kinds of happy inside. Because I was paying slightly extra on my old loan, my new payment is only about $20 more per month. I will not be paying anything extra toward this mortgage. Except, I am guessing that as I approach the end of the term, I will want to get rid of the monthly payment and still pay it off early.

I also have a nice happy feeling because I just helped the economy! For the most part, mortgages are owned by wealthy companies/individuals, and I lowered the interest rate they're earning from 4% to 3%. My local broker got some extra income, the state of Kansas got some extra fees, and everyone came out ahead!

False Modesty

It's long been a motto of mine that false arrogance is generally more fun than false modesty. It's a motto that has served me well over the years. Once people catch on, it's fairly enjoyable for all.

Lately, though, I've noticed there's been less and less falseness to my arrogance. It certainly hasn't been a conscious process. I can only assume that it's a natural consequence of my being so awesome lately. Seriously, I've been rocking it.

Traffic Courtesy Rules

While driving the other day, I noticed several people doing mildly discourteous things to their fellow drivers, or at least not optimally courteous. So, I figured I'd help educate a few people on how to make the road a nicer, safer, and more efficient place.

1. Prefer the leftmost lane when stopping at a red light. In general, only occupy the right lane when the left is two or more cars longer. This increases the chance of your direction being able to utilize the right turn on red. It also makes the right lane's traffic clear the intersection faster, which increases the chances of the opposite direction being able to utilize the right turn on red. As an added bonus, you avoid any slowness in the right lane caused by people turning right on green.
2. When stopped at a light, do not pull forward more than the lane to your right. This gives anyone turning right on red a clear view of oncoming traffic. Unfortunately, this is also a difficult rule to follow with Interstate on- and off-ramps, which often curve such that the natural inclination is to pull forward. It is especially important to follow this rule if you have a larger vehicle that obscures the view of adjacent cars.
3. Try to vacate the rightmost lane on the Interstate when approaching a busy on-ramp or interchange. Reducing or eliminating the need to merge keeps your direction, and however many directions are merging into your direction, flowing smoothly.
4. Learn how roundabouts work. This brochure from Wisconsin is good: http://www.dot.wi.gov/safety/motorist/roaddesign/roundabouts/docs/rab-brochure.pdf [pdf]
5. If you have a choice of turning left at the current light or the next light, and a motorcycle is the only vehicle in the left turn lane, help them trip the sensor by turning left with them.

Naturally, be safe in applying these rules. Still use the rightmost lane, even if it means keeping someone from turning right on red, when you have to turn immediately after the intersection. By all means, stay in the rightmost lane if you are exiting the Interstate soon. And it's better to annoy people by waiting to enter a roundabout until you feel comfortable, rather than causing an accident. These are some things to keep in mind, though. Anyone else have any helpful traffic hints that aren't necessarily common knowledge?

Refinance, Round 2

I refinanced my mortgage back in May of 2009, and it's apparently time to do so again. I'm going about things a bit differently, this time. I'm using the same mortgage broker as last time, though he's with a different company now: First Trust Mortgage. I guess I'm just listening to his advice more now.

Currently, I pay $1400/month, which includes a decent pre-payment amount, and I would currently pay off my mortgage in 230 more months. I decided to formalize that this time around and get a 20-year mortgage, which lowered my rate 0.25% compared to a new 30-year. This puts my required payment at just under $1300/month, which means I'll round up to $1300, of course. So, I'll increase my projected term by 8 months, but save $100/month and pay less in interest.

Another change is that I've opted for a no-cost refinance. Here, the lender pays my closing costs in exchange for an increased rate of 0.25%. I crunched the numbers again, and paying the costs myself for the 0.25% would save me 2 months off the end of my loan. If I refinance again, or pay it off early (likely once I get down to the last few 10,000s in principal), paying the extra money out of pocket now does me little to no good. I don't plan on refinancing again, but I didn't think rates would drop when I refinanced two years ago, yet here I am.

I'm quickly realizing that no-cost refinances don't mean there are no out-of-pocket expenses. I still have to pay the prepaid interest that accumulates between my closing date and the date of my first payment on the new loan. And I have to pay the accumulated interest on my current loan between my last payment and the closing date. I've also opted NOT to waive escrow this time. So, I'm shifting some expenses from December up to now, to the tune of roughly $3300. Add the interest payments, and it'll be more than $4000 out of pocket. It's all money I would be paying this year anyway, though.

One of the main reasons I decided to not waive escrow (I still think this is one of the stupidest terms - you aren't waiving escrow, you're paying in order to not do it) is that I was told you can often call your lender after awhile and request to waive escrow then - with no costs. They don't have to let you do it, but it sounds like they often do. I also have the spare cash now, whereas I didn't have nearly the reserves in 2009. So, I can shift my payments from December to now in order to save $500 or so. And again, if I do refinance again, that money would either be paid to waive escrow again, or I'd be back where I am now.

Another interesting tidbit came from my credit scores. Back in 2009, I averaged around 796, I'm pretty sure. Now, I'm averaging just above the top tier cutoff of 740. I'm pretty sure most of the loss is from getting a credit card back in December that I've been regularly putting large balances on and then paying off again. The combination of the recent credit application, high utilization on that card, and some randomly high activity on a credit card of my parents' that they included me on long ago in order to build my credit history, has resulted in a slight ding on my credit. It still seems to be OK, since I'm over 740 on all three. However, it would be quite annoying to have problems because of these otherwise irrelevant credit score fluctuations. I'll find out within the month!

Response to the House Republican Plan for America's Job Creators

The full document can be read here: http://www.majorityleader.gov/Jobs/HRP_JOBS.pdf. I will abbreviate this initially as the "Republican Jobs Plan," and when I get tired of typing that out, "RJP." Overall, the plan was vague to the point of uselessness, misleading in a number of areas, and economically dubious.

For the past four years, Democrats in Washington have enacted policies that undermine these basic concepts which have historically placed America at the forefront of the global marketplace. As a result, most Americans know someone who has recently lost a job, and small businesses and entrepreneurs lack the confidence needed to invest in our economy.

Contrary to popular Republican belief, it is not entirely the fault of Democrats that we are in a recession. Contrary to popular Democratic belief, it is not entirely the Republicans' fault, either. For example, we can turn to the omniscient Wikipedia: http://en.wikipedia.org/wiki/Causes_of_the_late-2000s_recession. This article briefly discusses many causes which can be traced back to one party or the other, and in many cases both. There's a reason that the country is dissatisfied with virtually all elected officials, and not just one party. The implication in the Republican Jobs Plan that we should think "Democrats' fault!" when we think of anyone that's lost a job is insulting to the complexity of the various causes, and shows a lack of integrity. Own your mistakes! And yes, that applies to all politicians.

Businesses, small or otherwise, do not invest in our economy - they invest in themselves to make an increased profit. Businesses create products or services to sell. That means they have to see (or create) a market. A business will not form or expand if there is not a market - why go into the business of selling something if you have nowhere to sell it? The market is a collection of people or other businesses that have money and a need or desire for your product. A good business idea will cover the "need or desire for your product" side of the market. People only spend money when they have it, or spend credit when they can reasonably expect to have money soon. Americans are referred to by both parties as innovators, entrepreneurs, and creative people. There are plenty of ideas being generated even in today's economy. What we have is too many people with too little money, and thus a lack of markets - a lack of demand to the Econ 101 folks out there.

Cutting taxes for the wealthy also does not create jobs, by and large. The wealthy don't hire people because they have more money to throw away. When they hire people, they hire them because they need to in order to get something done and/or make more money. When do they need to hire someone in order to make more money? When there are untapped markets. In general, business is very efficient at exploiting markets, and markets are inefficient at arising spontaneously and seeking out businesses. It seems to me that government economic stimulus, when needed, should focus on market creation and sustainability over business investment.

Democrats argue that income inequality and accumulated wealth inequality is unfair. Some aspects of that argument are compelling, but that is a topic for another day. Republicans argue that the inequality arises out of merit and hard work, which is only sometimes true, but is also a topic for another day. I would argue that income and wealth inequality is more a question of sustainability. Essentially, some businesses and individuals have become so successful that they have begun to destroy their own markets. They have accumulated so much wealth that not enough is left over for the bottom 21-40% (http://www.offthechartsblog.org/public-programs-keep-millions-out-of-poverty-new-study-shows/) to get by on their own. This means they spend less, which lowers overall demand, which lowers the incentive for businesses to expand.

Government takeovers of the economy have failed while the size and the scope of the federal government has exploded.

Generally speaking, the government has not taken over sectors of the economy. Health care is still provided by private enterprises. There was a temporary, partial takeover of GM, which is ending successfully. There is increased regulation in many areas, but that is not necessarily a bad thing. It can be argued that these new regulations expand the scope of the federal government, but the number of federal employees has been remarkably stable (http://www.opm.gov/feddata/HistoricalTables/TotalGovernmentSince1962.asp).

Background: The House has already acted on several regulations that hurt job creators both large and small including: The EPA’s regulation of greenhouse gases, the Federal Communications Commission’s net neutrality proposal, and duplicative and burdensome pesticide regulations.

The Supreme Court ruled that the EPA did have the authority to regulate greenhouse gases as pollutants, despite the EPA's claim to the contrary. I can only guess that the RJP (look at that, tired of typing already) mentions greenhouse gases in particular because of the public perception that global warming is dubious science. There are a number of sites devoted to debunking global warming skeptics, but it should be noted that there is strong agreement among climate scientists - those that are acknowledged to know the most about it: 97-98% of the most active climate scientists agree (http://www.pnas.org/content/early/2010/06/04/1003187107.full.pdf+html).

Net neutrality is very important to the free exchange of ideas on the internet. See http://en.wikipedia.org/wiki/Network_neutrality for an overview. It is by no means a clear-cut issue, and it is highly technical in nature. Neither side has gotten it exactly right (Democrats are closer, in general, on this one), but no regulation is definitely not the answer. At least, not until the broadband companies do not have monopolies or near-monopolies in many markets.

Duplicative regulations of any type should be eliminated. Pesticides fall into the category of things that most people think should be regulated, though. DDT comes to mind, along with the very simple fact that pesticides are used to kill living creatures, and I am a living creature. I think demonstrating that the product you want to spray on my food is not going to kill me is a great regulation to have. I think it should be just as burdensome as it needs to be in order to ensure that I don't die. I cannot emphasize enough how much I do not want to die.

Congress should eliminate the special interest tax breaks that litter the code and reduce the overall tax rate to no more than 25% for businesses and individuals including small business owners.
...
At a combined state and federal rate of just over 39%, the U.S. currently has the second-highest corporate tax rate among the developed nations of the world (those in the OECD).

First, the effective tax rate has been estimated to be much lower than the statutory rate cited in the RJP (see http://mediamatters.org/research/201004260006). Second, President Obama called for a similar overhaul of the corporate tax system in his 2011 State of the Union address: "So tonight, I’m asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years –- without adding to our deficit. It can be done." (See http://www.whitehouse.gov/the-press-office/2011/01/25/remarks-president-state-union-address.) The question, then, is why are you complaining about the problem instead of actively working to fix it? Also, lowering the tax rate of individuals should be a separate debate from the corporate tax rate.

Finally, the three bullet points in the "Republican Solution" to this section are all the same point - that corporate profits earned overseas shouldn't be taxed again here (much). Either admit to the fact that your solution is only one bullet point long, or think up solutions that require three bullet points.

For more than three years free trade agreements with Colombia, Panama, and South Korea have sat idle, blocked by House Democrats’ political posturing.

The FTA with Colombia has stalled due to human rights abuses in Colombia. (See http://www.hrw.org/americas/colombia, specifically http://www.hrw.org/en/news/2011/04/07/uscolombia-rights-conditions-crucial-trade-deal.) Human rights issues are not political posturing. The agreement with Panama was only finally recommended by the Obama administration on April 18, according to Bloomberg. At the bottom of that article is also a report of progress on the Colombian trade agreement.

The issues with the South Korea trade agreement seem to be more general, in that it doesn't help in certain key areas, such as off-shoring of both Korean and U.S. jobs to China, as described in the AFL-CIO's statement opposing it. Furthermore, Dean Baker, for example, has argued that free trade agreements do not actually promote free trade, and the Economic Policy Institute notes how NAFTA has not produced the net export gains claimed, and that the South Korean FTA is very similar.

Sometimes things are opposed for real reasons, and not just political posturing. Sometimes they are opposed for political posturing when they should be opposed for real reasons. This paragraph in the RJP is itself political posturing and does not further the debate.

Possible solutions include keeping the most accomplished graduates in math, science and other critical fields here in America as well as making it easier for start-up entrepreneurs to obtain visas.

I agree completely that motivated and skilled people should be encouraged to stay in the U.S. I take it that Republicans voted for the DREAM Act, which provided a path to citizenship to children who were brought here illegally, but through no decision of their own other than to stay with their parents? And only those children that were motivated enough to attend college or serve in the U.S. military? And then not be allowed to petition for family members until years later? Ah, no, Republicans nearly universally voted against it.

Since President Obama has taken office, American energy production has been halted and the average national price of gasoline has doubled.

American energy production has not been halted. There was a brief moratorium on new deep water drilling, but shallow drilling, land-based drilling, and all other non-oil energy production has continued, for better or worse. Also, it is not credible to blame the rising gasoline prices on Obama policies, even if only by implication (See http://mediamatters.org/research/201103140030 and http://mediamatters.org/research/201103310023 and http://mediamatters.org/research/201103030007).

President Obama and congressional Democrats have overseen the largest budget deficits in the history of the U.S. In the last two years, non-defense discretionary spending has increased by over 80%. They’ve maxed out our nation’s credit cards and are asking us to increase their credit limit so they can spend more.

I would guess that this figure includes the stimulus spending. Dean Baker is worth reading on this topic: http://www.cepr.net/index.php/blogs/beat-the-press/politico-has-not-heard-about-the-collapse-of-the-housing-bubble-and-economic-crisis. In general, accurately assigning blame for the budget deficit is not going to benefit Republicans. There is a reason Democrats point to studies like this: http://www.cbpp.org/cms/?fa=view&id=3036, and Republicans only talk about total spending amounts. Again, it's time for politicians on both sides to own their mistakes, and this attempt to pin the blame on Obama and Democrats exclusively is not welcome.

Speaking of owning mistakes, Obama has done just that in regards to the debt ceiling (See http://www.huffingtonpost.com/2011/04/11/obama-debt-ceiling-vote_n_847627.html). The debt ceiling itself is really not a political issue. It is a necessity if you want to preserve our role in the world financial markets. Deficit spending is more of a political issue, but the debt ceiling should not be tied to it.


This is not meant to be an exhaustive enumeration of all my thoughts on all these issues. If you would like to respond to any statements I've made, I welcome the discussion so long as it remains civil. A full explanation of my political stances is on my eventual to-do list. Debating the issues is how I've arrived at the positions I currently hold, and I always welcome the opportunity to refine my positions further - or even throw them out in favor of better ideas. So please, do comment.

Insights from Mint.com

Going over my Mint.com trends for the past couple years, I noticed a few things I thought were somewhat cool. In no particular order:

• 75% of my out-of-pocket expenses are for housing and communications - mortgage, property taxes, insurance, and all utilities including TV, Internet, and phone.
• I spend more for Verizon Wireless than I spend at Walmart. To be fair, my Verizon bill covers five people. To be unfair, Walmart covers the majority of my grocery expenses and cat food and litter. To be fair again, I eat out quite a bit, so groceries are cheap.
• I will also spend more for Verizon Wireless than I spend on eating out, once figures include a full 24 months of Verizon bills.
• I spend a lot at Chili's ($800), and it is probably worth getting any discounted gift cards I see.
• My expenses have actually gone up since I've started paying attention to them. Every month, I've spent more in 2010 than 2009. I've also had more cash on hand.
• It's very important to set up renaming rules right when the name of a merchant changes for whatever reason. From that point on, it becomes automatic.
• Rollover budgets are great in theory, but end up making the overall totals meaningless as they drift way negative or way over budget. Really, the budget feature itself is not as informative as the Trends tab.
• "In the past 30 days, you spent $309.62 on Clothing. Usually you spend $9." That $9/month is inflated because it includes a tuxedo rental and a bunch of clothes that weren't actually mine. In other words, I spend very little on clothes.
• It is also important to realize tax refunds are income that the government held for you, and not taxes. Assigning tax refunds to the 'Taxes' category can result in negative spending for the month, which looks awkward.

Peanut Butter and Jelly - In Depth

A few months ago, a friend made me grilled cheese sandwiches in a way that changed my own cooking method. She simply cooked it with a lid over the pan, but this made the cheese melt thoroughly and greatly improved the quality of the sandwich - more than I would have expected. I feel like I should pay that tip forward and provide my own tips for making peanut butter and jelly sandwiches.

Like using a lid when making grilled cheese, this is quite simple but ends up solving all of life's problems. To avoid soggy sandwiches in packed lunches, put peanut butter on both pieces of bread. Yes, it's that simple! This keeps the jelly from soaking into the bread, which in turn keeps the sandwich presentable and your hands clean.

There's one little caveat, though: When making a sandwich to eat right away, only one piece of bread should be peanut buttered. When both sides have peanut butter, the jelly moves around more when you bite into the sandwich. I.e., more jelly oozes out the sides and makes a mess. If you are going to eat the sandwich right away, the jelly soaking into the bread isn't really an issue. In fact, the slight bit that it does soak into the bread helps it stay in place and reduces jelly spills.

Do you have any simple tips for the kitchen or life in general? Pay this tip forward (and back at the same time!) by leaving a comment!