Angel investors (sometimes called business angels, informal investors, angel funders, private investors, or seed investors) are individuals who provide capital funding for a business (or multiple businesses), such as startups, in exchange for ownership equity.
Angel investment is usually a once-off investment that helps get the business off the ground, but it can occur at any point to help a company get through different stages of growth.
The term angel investor was first used by Willem Wetzel during a study into the ways entrepreneurs gather capital. These investors are called “angels” because they often invest in risky, unproven business ventures that cannot access other sources of funds, like formal venture capital or bank loans. These investors typically have excess funds available and are looking for a higher rate of return than traditional investments can provide.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
Angel investors are often the first investors into a startup.
These investors need to be accredited investors in order to angel invest. Sometimes, angel investment comes from the entrepreneur’s family and friends.
Every angel investor has a different style. Some angel investors will specialize in specific industries, like healthcare or technology; some will insist on a hands-on approach, while others will not be involved. It is up to the founder to decide which style they want on their cap table.
Angel investors typically invest at the earliest stages (pre-seed and seed) so that they can maximize their equity ownership.
Angel investors come from all different backgrounds.
They expect a higher rate of return than they would from traditional investments, so they are comfortable investing in illiquid assets that they will often turn out to be worthless. Angel investments rarely make up more than 10% of an investor’s portfolio, however, there are some investors with higher risk profiles that have their angel portfolio make up a much larger percentage of their investment portfolio.
Unlike a venture capital firm that uses pooled money placed in a strategically managed fund, the angel investor typically uses their own money. Some of these investors provide funds through a limited liability company, business, trust, or investment fund. They typically invest in the entrepreneur instead of the viability of the business and consider the return they may get in the future rather than immediate profits.
Angel investors may invest alone or as a part of a larger group.
To discover angel groups and other investors through Confluence.VC, check out our investor directory.
Angel investors make money by selling their equity at a later date.
These investors invest in early-stage companies with lots of risk and lots of reward. In exchange for providing capital, the angel investor will receive equity in the company in exchange for the funds they’ve provided, which should increase in value as the company grows. They may also receive dividends or a share of the company’s profits if it’s sold.
There are several advantages to angel investing to consider:
It’s important to consider the disadvantages of angel investments as well, including:
There are a few key differences between angel investors and venture capitalists.
Angel investors invest their own money; venture capital firms are professional investors that manage funds from institutional investors.
An angel will usually invest smaller amounts than venture capitalists would, but they are more willing to take risks on less established businesses.
For our full breakdown on what is venture capital, check out our venture capital 101 post.
An entrepreneur can find angel investment through a number of platforms, including crowdfunding platforms or angel investor networking events and pitch competitions. Startup accelerators and incubators may also provide assistance.
When choosing a potential angel investor, research and identify potential investors carefully and make sure that they are a good fit for your business in terms of their goals and experience.
Angel investors can provide a much-needed cash injection to fledgling businesses without the red tape and hefty terms presented by a formal investment company. These investments are suitable for all business needs, so research the option carefully before making a final decision.
The percentage of equity that an angel investor requires can vary widely and is typically negotiated on a case-by-case basis. Angel investors can take anywhere from 10% to 30% of a company’s equity, depending on the stage of the company, the amount of capital required, and the risk associated with the investment.
Individuals with a high net worth and a strong interest in startups. Some well-known angel investors include Peter Thiel, Reid Hoffman, and Ron Conway.
Your angel investors can bring valuable expertise, mentorship, and networking opportunities to your company. Many angel investors are successful entrepreneurs or business leaders who can offer advice, guidance, and important industry connections to the founders of the companies they invest in.
Angel investments can be lucrative for individuals with the resources and expertise to identify promising startups and can help them succeed, but it is a high-risk, high-reward asset class that is not suitable for everyone. Angel investors stand to lose some or all of their investment in any given startup and must be careful when structuring their portfolios.
Early-stage startups have a high risk of failure. According to a study by the Kauffman Foundation, more than half of angel investors lose money.
Most angel investors are accredited investors and meet certain income and net worth requirements set by the Securities and Exchange Commission (SEC). However, it’s not a requirement, and anyone with the means to do so can become an angel investor.
If you meet the SEC’s requirements for accreditation, you can join an angel investing group or network, which can help connect you to startups and provide advice about details. Financial advisors and industry mentors can also provide assistance if you have the means and risk appetite to become an angel investor.
An operating agreement is a legal document used by companies to define their organizational structure, roles and duties of owners and other key parties involved in the business, and methods for handling all transactions that occur within the company.
Stock options in startups work as a form of equity payment that allows an employee to purchase a certain number of shares of company stock at a specified price.
An over-allotment option allows companies to issue extra shares of their stocks beyond those that they initially planned or announced when they go public (or offer other securities). It’s also known as a “greenshoe option”.
Participating preferred stock is a type of preferred stock that gives the holder the option to receive dividends equal to or greater than the customarily defined rate at which preferred dividends will be paid to preferred shareholders.
