Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups

Traditional angel investing is binary. You invest $25,000, get your equity, and then wait to see if the company succeeds or fails.

Milestone-based investing offers a different approach. You commit capital upfront but release it in tranches as the company hits specific goals. Launch the product, get more money. Sign your first 10 customers, get more money. Hit $50,000 in MRR, get the final tranche.

On paper, this sounds smart. You're reducing risk by making sure the company is actually making progress before you deploy all your capital. The founder gets certainty about funding while staying focused on execution.

In practice? It's complicated.

The Appeal of Performance Triggers

The logic behind milestone-based investing is straightforward. Most startups fail because they run out of money before finding product-market fit. If you can structure capital deployment around meaningful progress markers, you're theoretically making your money work harder.

Elizabeth Yin, co-founder of Hustle Fund, has talked extensively about how the terms of a deal actually matter a lot. When evaluating investments, Hustle Fund looks at whether the valuation and terms make sense given the potential multiple. If a company raises at a $100 million post-money valuation, even if they sell for $1 billion, investors won't make much money.

Terms matter. Structure matters. And milestone-based investing is one way to manage those terms more actively.

The benefits can be real:

You're forcing the company to prove execution before deploying all your capital. You're creating clear goals that keep the team focused. You're giving yourself optionality if the company pivots or things go sideways.

For founders, having a committed funding source can be valuable even if it comes with conditions. It reduces the distraction of constant fundraising and lets them focus on building.

What Actually Works

Simple, objective milestones tied to product development. Things like "launch MVP to first 20 beta users" or "complete technical integration with X platform" work because they're binary and verifiable. Either you did it or you didn't.

Eric Bahn at Hustle Fund values great products and fast shipping. If you're structuring milestones around product development, you're aligning with what actually matters at the earliest stages.

Revenue or customer acquisition milestones for later-stage pre-seed. Once a company has launched, milestones tied to customer traction can work. Things like "$10,000 in MRR" or "50 paying customers" are concrete and relatively straightforward to verify.

But be careful here. Customer acquisition costs matter a lot. If a company is spending unsustainably to hit revenue targets just to trigger the next funding tranche, you've created perverse incentives.

Reasonable timelines that account for startup realities. Milestones need to be achievable in realistic time frames. If you're setting six-month targets for things that normally take two months, fine. If you're setting two-month targets for things that take six months, you're setting everyone up for frustration and renegotiation.

Where This Approach Falls Apart

Milestones become negotiation points instead of focusing mechanisms. The founder hits 40 of their 50 customer target. Do you release the next tranche? What if they hit 50 but the customers aren't paying yet? What if they hit 50 but three of those customers are friends doing favors?

Suddenly you're spending time arguing about whether milestones were actually achieved instead of focusing on whether the business is working.

Market conditions change and milestones become irrelevant. What happens when the company realizes they need to pivot? The milestones you set six months ago for one product might be completely irrelevant to the new direction. Now you're either forcing them to pursue a strategy you both know is wrong just to trigger funding, or you're renegotiating terms.

It signals lack of conviction. Strong investors back founders, not milestones. If you need performance triggers to feel comfortable investing, maybe you shouldn't invest at all.

Elizabeth Yin has been open about how Hustle Fund makes investment decisions. Even if they don't believe the current product is great or whether the team can fundraise easily, they're often still willing to make the bet anyway. Why? Because they believe in the team's ability to figure it out.

Milestone-based structures suggest you don't really believe in the team. You believe in specific outcomes. Those are different bets.

The Capital Stack Problem

There's another issue that doesn't get discussed enough: how milestone-based investments interact with the broader capital structure.

Elizabeth has talked about capital dynamics using examples from Hustle Fund's portfolio. When a company hasn't raised much capital and needs to make cuts, they can sometimes go flat and retain their customer base. That can work because the preference stack is low. You might be able to clear the bar of the capital you've raised with a modest acquisition.

But when a company has raised significant capital, the preference stack gets really high. Even if the company continues to do well, if they never have liquidity or get acquired below the preference stack, early investors get nothing.

Milestone-based structures add complexity to this. If you've committed to deploy $100,000 but only deployed $40,000 before things went sideways, what happens to your equity? Are you getting equity for the full commitment or only what you deployed? How does that affect everyone else's ownership?

These capital dynamics get messy quickly when you introduce conditionals.

When It Makes Sense Anyway

Despite the challenges, there are scenarios where milestone-based structures can work:

When you're doing a larger personal investment and want to test the relationship first. If you're considering investing $100,000 in a company, splitting it into a $25,000 initial check with $75,000 committed based on performance can be a reasonable way to dereskill.

When the founder specifically requests this structure. Some founders prefer having committed capital with milestones over uncertainty about whether they'll be able to raise their next round. If they're the ones suggesting it, that changes the dynamic.

When you're investing through a structure like a SAFE with a cap that adjusts based on milestones. Instead of withholding capital, you're offering better terms if they hit certain targets. This creates alignment without the same risk of conflict.

The Better Alternative

Instead of milestone-based structures, consider the Hustle Fund approach: invest smaller initial checks, build relationships with founders, and reserve capital for follow-on investments in companies that are executing well.

As Elizabeth has noted, Hustle Fund makes numerous small, rapid investments, focusing on a founder's ability to execute and iterate quickly. They use a spray-and-pray approach that requires different success metrics than traditional venture capital. They don't need one or two unicorns. The model works if a larger percentage of companies achieve modest exits.

This approach gives you optionality without creating the friction and misalignment that milestone-based structures often introduce. You're making initial bets based on conviction. Then you're voting with your follow-on dollars on the companies that are actually performing.

Making It Work If You Go This Route

If you do structure a milestone-based investment, keep these principles in mind:

Keep milestones simple and objective. Fewer milestones are better than more. Build in flexibility for the reasonable pivots that early-stage companies inevitably make. Put everything in writing and be extremely clear about what happens in edge cases. Maintain the relationship even if milestones aren't being hit exactly as planned.

The goal is alignment, not control. If your milestone structure feels like you're trying to micromanage the founder's execution, you've designed it wrong.

At Angel Squad, we've seen angels experiment with various investment structures. The ones that work best are usually simpler than people expect. Complex structures optimize for perceived risk reduction at the cost of actual relationship quality and execution speed.

If you're trying to figure out the right approach for your investing style and risk tolerance, engaging with communities of experienced angels can help you learn from people who've tried different structures and can share what actually worked. 

Join Angel Squad to connect with 2,000+ angels who can provide perspective on structuring deals, managing portfolio construction, and thinking through the trade-offs between different approaches to early-stage investing.