The fundamental requirement for a start-up is funding, however, due to circumstance this is often not possible for many entrepreneurs. Angel investors offer the possibility for anyone to build their dreams, even without the initial funding.
What are angel investors?
An angel investor refers to a private investor or seed investor, who is a wealthy individual providing financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. Angel investor funding is typically sourced from an entrepreneur’s family and friends. This investment can either be a once off payment to help kick-start the business, or through continuous injections of financial backing to help aid the company through its early stages.
How does angel investing work?
Angel investing is a specific type of private equity investing, which typically occurs within the very early stages of a business, in which they may not have clients or much revenue, however, they have a strategic business plan. This initial capital from the investors is what is used for research and development, helping the company to formulate its product and services.
Following this initial growth stage of the company, as the company begins to scale, venture capitalists are often sourced for the next round of funding.
There is no set investment minimum amount an investor can contribute, meaning someone could fund an amount as small as $,5000 and as large millions of dollars. This amount will impact the number of shares and amount of equity given by the start-up.
Benefits of angel investors
- Less risky than debt financing – Invested capital does not have to be paid back in the event of business failure as the investor has agreed to receive partial ownership in exchange for money.
- Increased opportunity for mentorship – As a part owner of the company, the investor is more likely to offer direct help and advice.
- Credibility – Along with the investor comes their credibility and reputability within the industry. This can attract attention to the business, and can attract other investors and funding.
Disadvantages of using angel investors
- Loss of control – Typically these investors want between 10% – 50% of the company in exchange for their funding, which could ultimately result in loss of control over the business.
- Ownership – Giving away too much equity could result in you losing ownership of the company, as the investor has a larger stake in the company.
- Pressure – Expectation of substantial return from investors. Prior to accepting funding, evaluate the ability of the business to meet the expectations of growth set by the angel.
Choosing the right angel
Choosing the right angel investor is essential to the long-term success of your company, as investors will receive equity and therefore partial ownership within the business. When looking for your angel or considering how to find angel investors it is important to have these 6 questions in mind:
- Do they have the relevant industry experience? – without knowledge or experience within your industry, the angel investor may not be able to understand certain choices being made or help give valuable insight, which is a large benefit of these investors.
- Are they reputable and can they offer references? – without the ability to check the references and reputation of the investor, you may be putting your company at risk, as if the investor has a poor reputation, this could be associated with your business.
- Can you work together? – Personality is an important factor as the process is like onboarding a new staff member. Ultimately the investor may be involved in some decision making and communication. If you do not feel like you get along with the investor or their values do not align, this will cause a problem in the future.
- What are their current and past investments? – Ensure that the investor is not currently involved with any of your competitors, as this may indicate a clash in their priorities and values. It is also important to note any past investment successes or failures, to analyse how failure can be avoided within your company. It is also important to evaluate whether they stayed with their past businesses through rough patches, to determine their commitment.
- What is their planned level of involvement in the business? – From your initial interaction, determine how involved the investor wants to be within the business, and if you are comfortable with this, or if you feel this would impact the company structure.
- What are their connections? – Determine if they have any valuable connections to the business, which could result in further investment or business partners.
Sourcing an angel investor
- Linkedin – This is a highly effective tool to find Investors, which can suit your criteria including; their relevance to your industry, shared connections, location and experience. Simply search “angel investor” on Linkedin and filter through the results, there is also an easy way to communicate with the potential investor using the messaging feature.
- Angel List – This tool allows you to list your startup company, creating a profile pitching your company performance and statistics. Investors, who have subscribed to the website, will then be able to see your profile and easily invest in your company.
- Local business groups or schools – Your local connections can be really valuable within the investment stage, as you have already built trust and a reputation within your community. Reach out to any of your connections and pitch your idea, as you never know what connections they may have as well.
- Angel Investment Network – This tool is similar to angel list in which an entrepreneur or start-up can sign up and make a profile. You can then include a pitch and publish this to display all the details of your business including an investment range goal. If an investor likes your pitch, you will then receive an email asking to connect, which will give you access to their contact details to discuss the pitch in more detail with them and potentially close investments.
Legal advice
Angel investors are onboarded using a Term Sheet, which is a legally binding investment agreement. This will set out the provisions and terms of the arrangement including the agreed equity, share and financial contribution between the parties. If you are a start-up or an angel investor, and you believe that the other party has breached the agreement, or you simply want clarification surrounding the legalities of the agreement, Legal Kitz can assist you. To arrange a FREE consultation with one of their highly experienced solicitors, click here today, or contact us at [email protected] or 1300 988 954.