What is an Angel Investor?
Angel investors are individuals or groups who invest in startups or early-stage companies in exchange for an equity stake in the business.
What is Angel investing and how does it work?
Angel investors hit the scene at a critical moment when an early-stage company needs money to grow, is on the verge of running through its initial funding, and hasn't developed enough for venture capital groups to show interest in partnering. Here’s how the actual process of working with an angel investor goes down:
An angel investor connects with a young company through word of mouth, business and industry seminars or conventions, referrals from professional investment organizations, online business forums, or local events like a chamber of commerce meeting.
If there’s a mutual interest, the angel investor conducts due diligence on the company by talking to the founders, reviewing business investment documents, and gauging the company's target industry.
Once a verbal agreement with the angel is in place, a term sheet or contract is drawn up, with agreements on the investment terms, payouts or equity percentages, investor rights and protections, governance and control parameters, and an eventual exit strategy for the angel investor.
Once the contract is finalized, a legal agreement is created and signed, the deal is officially closed, and the investment funds are released for the company’s use.
Types of angel investors
Angel investors often come from the business world, but that’s not always the case. Angel investors often come from these walks of life:
- Business professionals like financial advisors and accountants or other professionals like lawyers and doctors
- C-suite executives who have a wealth of knowledge regarding running a business
- Successful small business owners and entrepreneurs who know how to spot startups with potential
- Investors who make financing startups their professional pastime
- Crowdfunding platforms that pool money from groups of people
Angel investors vs VC
It’s easy to confuse or conflate angel visitors with venture capitalists (VCs) since both fund companies for a piece of the equity pie. Not to mention, both tend to invest in startups, only further blurring the lines between them.
The two things that often distinguish these groups are:
When they invest: Angel investors typically invest when a company is still in its early stages and is only an idea. VCs, take an interest in companies further down the line when proof-of-concept is available.
How they invest: Angel investors are private investors that pour their own money into a company. VC funds are institutions, with managers who invest other people’s money and their own.
Given these differences, angel investors typically don’t have as much money to invest and are more likely to take a hands-off approach with their investment.
The best view is side-by-side.
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