An Angel investor is an individual who offers promising startup companies funding in exchange for a piece of the business, usually in the form of equity or royalties. While figures vary on an annual basis, as recently as 2017 angel investors put approximately $25 billion into 70,000 companies.
Angel investors may or may not be accredited, investors. This classification is given only to investors with very high incomes or net worths. With the passage of 2012’s Jumpstart Our Business Startups Act, the criteria for startup investors was expanded to include more everyday retail investors, including crowdfunding campaigns.
Sources of Angel Investing
- Angel List: An online platform that helps business owners find investors.
- Angel Investment Network: An online network with over 279,000 investors. Business owners can create a profile and promote their business.
- LinkedIn: Professional social networks, like LinkedIn, can give you a direct way to contact an angel investor.
- Local business groups or schools: Check local business schools or organizations in your area to see.
How Angel Investing Works
Angel investors prefer to involve in the early stage of a company, at the “seed” or “angel” funding phase. That could mean the angel invests when the company exists only as an idea. Or it could come when a business is already up and running.
Sometimes angel investors arrive on the scene after the initial round of funding, which normally comes from the founders themselves, friends and family of the founders or from bank financing. Typically, initial business funding isn’t substantial—it’s common for founders to roll out their product or service with $10,000 or so in initial funding.
Angel investors come in after the original funding is in place but typically before a company requires a more sizable investment from a venture capital company. Their investment grows a company at a critical (and usually early) stage of development after the initial funding threatens to run out and before venture capital groups show interest in partnering with a promising business.
Steps of the process of Angel investment
Here’s how the actual investment process rolls out:
Angel investors connect with young, developing companies through word of mouth, through business and industry seminars or conventions. Also, it happens through referrals from professional organizations, online business forums or via events like the chamber of commerce meetings.
If there’s a mutual interest, the angel investor will conduct due diligence on the young company by talking to the founders, reviewing business investment documents.
Then, you need to have a verbal agreement and form a term sheet/contract with investment terms agreements, payouts or equity percentages. It consists of investor rights and protections, governance and control parameters and an eventual exit strategy for the angel investor.
After both sides finalize the contract, they create and sign an actual legal agreement. The deal officially closes and the angel releases the investment funds for the company’s use.
While contribution amounts vary, funding levels can be as low as $5,000 and as high as $150,000. Some angel investors group as a syndicate and can provide funding up to $1 million for select companies.
Angel investors don’t usually acquire more than a 25% stake in a company. Veteran angel funders know that the company founders need to hold the highest stake in their own companies. Then they also have the highest incentive to make their companies successful.