What is an angel investor?

Angel investing is a popular method for wealthy individuals or organizations to start a company or grow an existing business. Angel investors give business owners money in exchange forequity in their company.>Many angel investors, also known as “angels,” make their initial investment with the hope that they will eventually own a percentage of a multi-million dollar company.

The term angel investor originates from Broadway theater in New York, referring to wealthy patrons who would provide funding for shows and productions that would not have been able to continue on their own. It started being associated with people who invest in entrepreneurs in the late 1980s.

If you are willing to sell equity in your business and can demonstrate that you have a business concept with potentialfor growth, you could consider an angel investor. You can even work with multiple angels through several rounds of funding as your business grows. Angel investors can be beneficial for small businesses that are already making money but need a large amount of up-front capital to reach a new market, open a manufacturing facility, launch a new product or fulfill inventory orders.

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Who can be an angel investor

Angel investors have a high net worth and liquid assets that they can use to invest in startup companies. Usually, angel investors have accumulateda significant amount of personal wealththrough their careers.Most angel investors have Securities Exchange Commission(SEC) accreditation and meet one of these key requirements:

• Net worth of $1 million or more, excluding personal residences
• $200,000 yearly income for the past two years for individuals
• $300,000 combined yearly income for the past two years for couples

How angel funding works

When an angel investor finds a business they are interested in, both parties will decide on how much equity to exchange for the requested amount of funding. After the negotiation, the angel writes a check to the business owner to purchase a percentage of equity in the business, or as a low-interest loan or line of credit. The angel then owns that percentage of the company and will receive a proportionate share of future profits.

Angel investing has a high level of risk alongside the potential for lucrative rewards. Angel investors frequently mentor a business owner as they grow their company, then sell their equity in the company once it is highly successful. If an angel invests in a business and it fails or loses value, they will lose their initial investment, so they have a strong motivation to help each business they invest in to succeed.

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Small business loans vs angel investments

Business owners can seek out large amounts of capital through angel investors or through small business loans. Depending on your timeline, financial needs and business goals, one option may be better suited to your company than the other. When deciding where to look for funding, consider the pros and cons of both loans and private investments.

Small business loans

Taking out a small business loan for your business has many attractive qualities, including:

• You keep full ownership of your business and future earnings.
• You can choose between multiple types of loans.
• Loan repayments are often tax-exempt.

Small business loans also have some negatives:

• You need good credit to get a low rate, which can be difficult for startups.
• You have to pay the money back with interest.
• The application process can be lengthy and complex.

Benefits of angel investments

Some of the benefits of working with an angel investor are:

• You don’t have to pay back funds you earn from equity sales.
• Loans are more flexible with repayment dates.
• You gain access to business experience and mentorship.
• Industry connections with influential business people.
• The money will be available soon after making a deal.

Possible drawbacks of angel investments include:

• You often have to give up equity in your company.
• Future profits must be split with the owner-investors.

How to get funding from an angel investor

Follow these steps to find an angel investor, ask them for funding and start a business relationship:

1. Determine if your company is a viable investment

Before putting research into finding angel investors and convincing them to invest, take a serious look at your company’s financial situation, scalability, market potential and other attributes that could influence future success. Angel investors look for businesses that are scalable, which means they can make a profit and sustain a business model even with extremely high sales volumes.

2. Develop a pitch

You will need a strong pitch to succinctly explain your company and why it would be a smart investment. Create an elevator pitch to catch people’s attention, then develop a detailed presentation to explain more about your company. Make sure you are prepared with information like:

• Mission statement
• The problem your business solves
• Target market
• Sales numbers and financial forecast
• Marketing strategy
• Management background

3. Reach out to investors

Once you’re organized, start seeking potential investors. Start with the people you know, and search your professional network for possible leads. Having a personal connection with an investor can help you stand out among other business owners. After pursuing leads from your immediate circle, attend trade shows and industry events to make connections with people who can help promote your business. You can also search online directories or reach out to investment groups with a proposal.

4. Champion your company at a meeting

If an investor is interested in working with you, schedule a meeting. Research the investor and find out what business qualities they are looking for and emphasize those during your presentation. Be friendly and professional, keeping in mind that this may be the start of a relationship with a co-owner. Prepare to take a stand for your business and explain your strategy to overcome challenges.

Related:How to Get Business Funding: A Guide for Employers

Frequently asked questions about angel investors

Here are a few frequently asked questions about angel investing:

What percentage do angel investors want?

The percent equity angel investors want varies from person to person. Some investors may only want five percent, while others might want a controlling share of 51% or more.

When is the best time to reach out to an angel investor?

Make your pitch to angel investors when you are prepared to take your product to market or upgrade to the next stage of your business plan.

What is the difference between angel investors and venture capitalists?

Angels invest their own money, while venture capitalists invest money from large institutions like insurance companies.