As lead instructor at the Golden Seeds Knowledge Institute, I teach our introductory course, “Angel Investing 101: The Risks and Rewards of Angel Investing.” Most of the people who attend are relatively new to angel investing, so it’s not uncommon to receive similar or repeat questions during and following each course. If you’re new to angel investing, or just want to learn more about what it means or where to begin, here are the top six questions we get about angel investing, along with our responses:

1. How do you know if the company has an idea that’s worth considering?

It’s certainly understandable why this question continues to be asked at our intro course, and it’s an important one — one that all investors need to consider. An entrepreneur needs to be articulate and specific when they explain the problem they are trying to solve, and how exactly they plan to solve it. An investor needs to understand the solutions currently on the market, and why the entrepreneur’s approach is better, faster, less expensive or more efficient.

It’s also important that an investor understands the potential market size to determine if it’s big enough. For example, our philosophy is that the total addressable market should be at least $500 million. And that number isn’t just those who are willing to use the product — it’s those who are willing to pay for it, as well.

2. What are the key traits to look for in a successful entrepreneur?

A successful entrepreneur is coachable. In this context, coachable should not be confused with doing exactly and only what the investor says, but, rather, it means taking suggestions in a thoughtful manner and using that information to build a strategic decision-making process. A successful entrepreneur should have relevant industry experience. A successful entrepreneur surrounds herself with great talent, hiring the smartest people she can find. A successful entrepreneur can put the company before ego to motivate the team in a meaningful and sustainable way. A successful entrepreneur has advisors who bring skills and knowledge, possibly strong industry expertise, that the entrepreneur may not have

3. How do you know how much due diligence to perform?

Our due diligence is conducted in an organized and structured manner — we even have a “playbook” that guides us step-by-step in the process. Due diligence is a collaborative process, which means it is always best executed by a group of people who bring with them a variety of skill sets. We use the Proseeder platform, which serves as a central repository for information and communications. It’s also important to remember that due diligence must be centered around an investment hypothesis. Keep in mind that no matter how much due diligence you conduct, you cannot expect to learn everything.

4. How do you assign a value to a start-up company?

Traditional methods of valuation are not applicable for early stage companies. The goal is to create a valuation that both parties think is fair. After all, both the investor and the entrepreneur should be motivated to form and maintain a productive partnership.

Entrepreneurs often make the mistake of establishing a valuation based on future predictions rather than what the company is actually worth today. Investors, on the other hand, will create a valuation based on what exists today or what has been accomplished thus far. There are a variety of methods of valuation for which successful angel investors often advocate, including those methods that focus on placing a value on the business model, product sales, or even the attributes and experience of the team. It’s critical that entrepreneurs are familiar with those valuation models before they even begin to seek funding.

5. How do you prevent an entrepreneur from “going dark?”

In the world of angel investing, “going dark” means the entrepreneurs have stopped sending updates to the investors. This is problematic because post-investment transparency is a critical component of success. Good entrepreneurs don’t only keep the line of communication open when business is going well, but also during the downturns. One of the best ways to ensure the flow of information is to have a representative on the board of directors, or, at the very least, a board observer. Many investors obtain “information rights” as part of the investment agreement documenting what entrepreneurs are legally obligated to provide, such as quarterly updates, a year-end review and a forward-looking annual budget.

6. How do you build a successful portfolio of startup investments?

Every investor has a different risk tolerance, so it’s important the portfolio aligns with the investor’s tolerance level. One of the most important components of angel investing is diversification. For example, many investors believe that a successful portfolio contains 15 to 20 companies.

Learn more about the Golden Seeds Investor angel network.