Just like the name implies, angel investors are angel-like figures to early-stage entrepreneurs. In this QuotaWiki post, we will cover the concept of angel investor along with its bright and dark sides.
🙋What is an Angel Investor?
Angel investors are wealthy individuals who provide financial backing for small startups or entrepreneurs in exchange for equity. The fund they provide may be a one-time investment to help the business get off the ground, or a continuous injection to support the company through its difficult early stages. Angel investors provide more favorable terms compared to other lenders because their interest is helping startups take their first steps, rather than the possible profit from the business. Angel investors are also called informal investors, private investors, seed investors or business angels. Though angel investors usually represent individuals, some invest through crowdfunding platforms online or build angel investor networks to pool capital together. Angel investors typically acquire less than 25% stake in a company. This is because veteran angels know that the startup founders need to hold the highest stake so that they also have the biggest incentive to make the company successful.
🤔The Pros and Cons of Angel Investors
Since most angel investment involves equity deal, business owners are not obligated to pay back the funds. Also, angel investors are often entrepreneurs themselves. They have years of business knowledge and experience, being able to serve as a mentor or offer direct management assistance. Finally, angels usually start funding the company in a long-term perspective. This means they are likely to make another cash injection later.
As explained above, angel investors get equity share as a compensation for their funding. This is advantageous in that business owners are free of repayment, but in some cases, such equity financing could turn out to be more expensive than debt financing. What’s worse, the business owners could even lose control of the company if angel investors require high percentage of ownership.
🤔Angel Investors vs Venture Capitalists
Both angel investors and venture capitalists tend to invest in startups in exchange for equity ownership, but they are significantly different from each other. The biggest difference is that they get involved at different stages in a startup’s lifecycle. An angel investor is willing to provide capital for an idea whereas most VCs would like a proof of concept in hand. Another difference is the amount and source of funds. In addition to their own dollars, venture capitalists raise funds from other people and make investment with it, generally writing checks of $2 million or more. On the other hand, angel investors are private investors investing their own money, so they typically write much smaller checks between $10,000 and $100,000. Source of funds also makes a difference in due diligence. Due diligence is a must for venture capitalists given that they have a fiduciary responsibility. Meanwhile, angel investors aren’t really bound to it since all the money is their own.
By its nature, angel investors have more flexibility in terms of making investments. It is important to remember those who believed in your product even before it was brought to the world. Handling investor communication becomes more and more important as your company grows and it's always challenging to follow up with all investor communication. Angel investees tend to be not familiar with such process due to lack of experience, but QuotaBook can help with templates and keeping track of necessary indicators. Let’s schedule a demo to discuss your needs and show you how we solve them.
※ Legal disclaimer
Make Equity Complete — QuotaBook is a global equity management platform with a mission to create an ecosystem for private companies and their investors and employees. Leaving spreadsheets and manual works behind, every stakeholder can connect online and sync crucial data on equity such as cap table or employee stock options. It is the leading platform used by top startups and VCs in Asia, backed by Y Combinator.
This piece is written for information purposes only and is not intended as financial or legal advice. QuotaBook does not assume any reliability for dependence on the information provided above.