angel investor business plan example

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• Write Your Business Plan | Part 1 Overview Video
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How to Fund Your Business With Angel Investors Angel investors are individuals who use their own money to back entrepreneurs they believe in.

By Eric Butow Edited by Dan Bova Oct 27, 2023

Key Takeaways

• Angel investors invest their own money.
• Angel investors tend to have a people-first philosophy when choosing which businesses to back.
• There are many digital networks that connect entrepreneurs with angels.
• Angels tend to start with small investments and add as they see progress.

Opinions expressed by Entrepreneur contributors are their own.

This is part 7 / 11 of Write Your Business Plan: Section 2: Putting Your Business Plan to Work series.

If you are having trouble getting funding for your venture under the right terms, or under any terms at all, you'll be glad to know about the existence of angels in the investment world. Angels are individuals who invest their own money, as opposed to institutions or professional money managers, who invest other people's money. Many angels are well-off professionals, such as doctors and lawyers. Some are retired but have tremendous expertise to share in a specific field. Others are successful small business owners who have made a bundle with their own entrepreneurial efforts and are now interested in letting their money work for them in someone else's venture.

Because angels invest their own money, you might think they are the most discriminating, difficult-to-please investors. In fact, they are as a rule much more willing to take a flier on a risky, unproven idea than are professional investors and lenders.

Related: 6 Ways Angels and VCs Think Differently

That's not to say that they won't do their due diligence, but angels often take a personal interest in a project and may simply believe strongly in the person behind it…that's you! They are usually swayed more by personal concerns than by financial ones.

Note: [Due diligence refers to all the things an investor should do to check out an investment. It has a legal definition when applied to the responsibilities of financial professionals, such as stockbrokers. In general, it includes such things as requiring audited financial statements and checking warehouses for claimed inventory stocks.]

Finding Angel Investors

While angel investors used to be located primarily by word of mouth, they are easier to find in the electronic age. The Angel Investment Network helps angel investors and small businesses seeking capital meet online.

The Angel Capital Association is another place to learn about angels and seek out an angel network—a local group of angel investors in your area. Visit them at www.angelcapitalassociation.org .

Keep in mind that angels are, above all else, unconventional. Many have little training in evaluating business ideas. If twenty angels turn you down, it doesn't mean a thing. Until you've gone through the last name in your Rolodex, you still have a chance of landing an angel backer.

Related: 7 Important Differences Between Angels And VCs You Need To Know

Tim Berry describes the path to finding the right angel in his article " How to Land Funding From Angel Investors ," writing:

Consider Harold Lacy's "six degrees of separation" method. Your angel might be somebody you know, recommended by somebody you know, or a local investment club, business person, perhaps even a local development agency.

Angel investors often focus on local markets, specific industries, and affinities such as college or university alumni. Your search should include looking for angel groups related to the college or university from which you graduated; your town, or state; and the industry you're in.

Use web search. Search for "angel investors in [your area]" or "angel investors [your type of business]" or "angel investors [your college or university] alumni."

Related: Glamour of VC Funding VS Patronage Of Angel Nurturing

What Angels Investors Are Looking For

You may also fit angel guidelines if you don't need a whole lot of money. Institutional venture capitalists can, by pooling the funds of several different groups, raise vast sums. It's not unheard of for venture capitalists to invest nine-figure sums—more than $100 million—in relatively new, unproven ventures. Even Bill Gates or Warren Buffett is unlikely to feel comfortable sinking that kind of money into anything uncertain. Your angels' capacity will vary, of course, but angels tend to start small and see how you are doing before adding to the pot. One of the nicest things about the angel networks that have formed in recent years is that they can pool their resources, giving you a few angel investors in one place at one time. This also makes it easier when you are preparing to meet with angel investors. Rather than meeting one at a time, you can meet several in one angel network or even a couple who will spread the word among their partners so that they can decide as a group.

Related: 3 Things That Make Angel Investors Want To Invest In You

If you're after angels, it's in your interest to guard their interests. Unsophisticated angels may, for instance, give you money without specifying exactly what they are buying, such as percentage of ownership. Such angels can be taken advantage of. But you may want more help someday, and angels tend to talk with each other. So make it legal, make terms clear, and take care of their interests.

Related: Where To Find Angel Investors

More in Write Your Business Plan

Section 1: the foundation of a business plan, section 2: putting your business plan to work, section 3: selling your product and team, section 4: marketing your business plan, section 5: organizing operations and finances, section 6: getting your business plan to investors.

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Angel Investors: Who They Are, Pros and Cons

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What is an angel investor?

How does angel investing work, pros and cons of angel investors, should you get an angel investor, how to find an angel investor, alternatives to angel investors.

Angel investors are typically high net worth people who fund startups or early-stage businesses in exchange for stock or ownership in that company. This makes them a good source of funds for newer businesses that want to avoid taking out a small-business loan .

Many angel investors are accredited investors, which is a designation that requires a minimum net worth of $1 million, at least $200,000 in annual individual income or at least $300,000 in annual joint income (see the Securities and Exchange Commission website for details). People who hold a Series 7 license (a broker license), a Series 65 license (an investment advisor license) or a Series 82 license (a private securities offerings license) may also qualify.

Angel investors can be friends, family, members of your professional or social networks, individuals or a team of investors. Angel investors often form “angel groups,” in which they evaluate businesses and invest together, pooling resources to make larger investments. Angel investments can be thousands to millions of dollars, depending on business size and ownership sold.

How much do you need?

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Angel investors typically want ownership in the company they invest in, making this a form of equity financing . An angel investor may provide capital in exchange for equity (stock in the company) or convertible debt, which is a loan that can be converted to equity at a later date.

For example, a company that's valued at $1 million might sell 20% of its equity, worth $200,000, to an angel investor or an angel group.

Generally, angel investors are interested in high-growth, high-potential startups that can earn them several times their original investment. In other words, the potential rewards need to be substantial enough to outweigh the numerous risks of investing in a startup.

A startup business refers to any business in the early stages of growth, including businesses that haven’t started operating yet. Because most banks want to see at least two years in business before approving a business loan, pre-revenue startups may need to turn to venture capital firms or angel investors for funding.

Advantages of angel investors

Expertise. Angel investors often have industry expertise. They may be entrepreneurs who started a business in your field and can provide advice and coaching to help you succeed.

Connections. Angel investors may have a lot of industry connections. They may be able to introduce you to new customers, financing sources , business partners and other relevant contacts.

Support. Because their investment makes them partial owners of the business, angel investors typically make money only if the business is successful. This position should motivate them to help add as much value as possible.

Deep pockets. If your small business needs financing later, angel investors might make follow-up investments.

Different qualification requirements. Angel investors look primarily at you and your business’s potential, which means they are a good alternative funding source if your business can’t get financing from a bank or financial institution.

Disadvantages of angel investors

Scrutiny. Investing in a startup is risky, and angel investors are typically looking for a high-growth type of business. Even if you think your company offers outstanding growth potential or a game-changing product, angel investors still might reject your pitch. 

Shared control. Some angel investors might demand a large ownership position, and you may end up selling more of the company than you had planned.

Time consuming. Do due diligence on an angel investor to ensure their interests are aligned with yours. Ask for references and, if possible, talk with other startups that raised money from this investor. You may prefer an angel investor who will be a business partner, help your company grow and contribute to its success, instead of one who's just looking for a return on their investment.

Startups and early-stage businesses that can be scaled for growth are generally the most attractive angel investments. This means your business should be able to increase its sales very quickly over the next few years without a huge increase in fixed costs and expenses. This should be detailed for a potential investor in components of your business plan , like financial projections and market analysis.

If you’re willing to give up ownership and potentially control of your company — and think you’d benefit from bringing an experienced investor on board — then angel investors could be a smart move.

You can find potential angel investors in places like these:

The Angel Capital Association , which is the official industry alliance of over 250 of the largest angel investor groups in the United States.

AngelList , which helps match founders with investors.

Gust , which evaluates various funding sources for startups.

MicroVentures , an investment bank offering private market investments.

The Angel Resource Institute , a nonprofit that provides education and information on the best practices in the field of angel investing.

If you’re having trouble finding an angel investor, or you decide angel investing isn’t right for your business, there are some alternatives:

Startup business loans . Banks , online lenders or alternative lenders like community development financial institutions (CDFIs) may offer startup business loans, especially if you have been operating already. Loans can be difficult to qualify for and keep you locked in with fixed payments over a set period of time, but do not require you to trade ownership in your business for funding.  

Startup business grants . While grants offer free money, they can also be difficult to find and qualify for, and come in smaller amounts than loans or angel investments.  

Venture capital . Though similar to angel investing, venture capital (VC) is early-stage business funding by a firm or company as opposed to a wealthy individual. Venture capital can be slightly more difficult to qualify for, and usually VC firms invest in a company after an angel investor. 

Equity crowdfunding . Another form of equity financing whereby you trade equity or ownership in your company for funding, equity crowdfunding makes use of the internet to find groups of investors. Online platforms allow business owners to share information about their business with potential investors. 

On a similar note...

Angel ROI: How Much Equity Should You Expect To Give an Angel Investor

Written by Dave Lavinsky

When pursuing funding for your company, you are bound to consider angel investors at some point. They are a common source of early-stage funding and can provide the boost your company needs to get off the ground. But before taking angel money, it is important to understand how these investors work and how much they expect in return. This guide will explain everything you need to know in terms of angel investments , ROI, and what to expect in terms of equity.

Download the Ultimate Business Plan Template for Angel Investors here

How Most Angel Investors Invest In Companies

Angel investors are typically wealthy individuals who invest their money into companies in exchange for equity. They are often former entrepreneurs themselves or have some experience in the industry in which the company operates. Because they are investing their own money into the business venture, an angel investment tends to include more hands-on management than venture capitalists investment.

There are three ways that angel investors typically invest in companies:

• Direct equity stake: The angel investor buys shares of the company outright and becomes a shareholder.
• New Business loans: The angel investor loans the business owners money with the expectation that the loan will be paid back with interest.
• Convertible preferred stock: The angel investor purchases shares of preferred stock that can be converted into common stock at a later date.

What Is The Average ROI For Angel Investors?

On average, potential angel investors expects to see a return of about 27% or 2.5 to 3 times their initial investment within 5 to 7 years. This means that if an angel investor invests $100,000 into a company, they expect to see a return of $250,000 to $300,000 over the next 5 to 7 years.

However, it is important to keep in mind that angel investing is a high-risk, high-reward venture. While some angel investors may see returns of 10x or more, others may end up losing all of their investment. Some angel investors may ask for a higher equity stake in exchange for a lower ROI, while others may be more flexible. Most angel groups invest knowing that very few startups succeed, which is why they do not tend to start with larger investments. 

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Factors That Affect An Angel Investor’s Equity

There are a few key factors that will affect how much equity an angel investor will receive in return for their investment.

• Company’s Valuation: The pre-money valuation is the value of the company before the angel investor makes their investment. This number is important because it will determine how much of the company the angel owns after they invest, and what their equity positions will be.
• Timing: The angel investor’s equity stake will also be affected by when they make their investment. If the angel invests in the first round or early on in the company, they will likely receive a larger equity stake than if they invest later down the road.
• Their Initial Investment: The size of the original investment helps to dictate the equity the angel investor receives. Typically the larger the angel’s investment, the more equity they will receive.
• The Amount Of Money The Company Needs: If the company is seeking a large amount of money or venture capital, the angel’s equity stake will be diluted more because they will own a smaller percentage of the company.

What Ownership Stake Should You Offer an Angel Investor?

As a general rule of thumb, angel investors usually receive between 10% and 20% ownership stake in the companies they invest in. However, there are a few factors that can affect how much equity an angel investor will receive.

Factors Affecting Ownership Stake for Angel Investors 

Stage of the company.

If the company is early or startup stage and has yet to generate any revenue or annual income, the angel investor will likely receive a larger equity stake. However, if the company or small business is further along and has already generated some revenue, the angel investor will likely receive a smaller equity stake.

Investment Amount 

As mentioned before, the more angel’s provide funding, the more equity they will receive. This is often discussed before any deal is made and clearly outlined on the term sheet . 

Investor’s Experience 

If the angel investor has a lot of experience in the industry or are accredited investors, they will likely receive a larger equity stake. However, if the angel investor is new to the industry, they will likely receive a smaller equity stake.

When business owners decide to look for angel funding, they will usually negotiate their equity as well as their ROI with the angel investor. Some angels may ask for up to 50% equity in the company, while others may be willing to accept a lower equity stake in return for a higher ROI. Others still may be willing to offer equity financing to allow for some form of equity along with a business loan. There are many different options available when businesses find angel investors, so be aware that you will need to negotiate with investors in order to come to an agreement that is fair for both parties.

When Do Angel Investors See A Return?

An angel investor typically sees a return on their investment within 5 to 7 years. However, it is important to keep in mind that angel investing is a high-risk, high-reward venture. While some angel investors may see returns of 10x or more, others may end up losing all of their investment.  

Click here to finish your angel investing business plan today.

What Are Other Ways That Angels Earn From Their Investments?

There are a few other ways that angels can profit on their investment. They may negotiate these terms in order to ensure they get some money back no matter what the outcome of the company is. Three of these strategies include:

• Exit strategies: One way that angel investors earn from their investments is through successful exits. An exit strategy is a plan for how the angel investor will get their money back when they sell their equity stake in the company. There are a few different exit strategies that angel investors may use, such as an IPO (Initial Public Offering) or a sale of the company.
• Dividends: Another way that angel investors can earn from their investments is through dividends. Dividends are payments that angel investors receive from the company in return for their equity stake. The amount of dividends that an angel investor receives will depend on the company’s profitability and the angel’s equity stake in the company.
• Employee Compensation: Some angel investors may negotiate a role in the company in return for their investment. This could include a board seat or a position as an advisor. Angel investors who take on this type of role will typically receive some form of compensation, such as a salary.

Angel investors play an important role in the startup phase for many businesses, and is often included in their initial business plan. They provide much-needed funding for early-stage companies and help them to grow and scale. In return for their investment, angel investors usually receive equity in the company. It’s important to remember that angel investors are taking on a high risk by investing in early-stage companies. Therefore, they usually expect to see a high return on their investment. Keep this in mind while negotiating with angel investors, as you will need to come to an agreement that is fair for both parties.

Angel Investor Frequently Asked Questions

What is the average roi for angel investors.

The average ROI for angel investors is 27% within 5 to 7 years. However, it is important to keep in mind that angel investing is a high-risk, high-reward venture. While some angel investors may see returns of 10x or more, others may end up losing all of their investment.

What is an exit strategy?

An exit strategy is a plan for how the angel investor will get their money back when they sell their equity stake in the company. There are a few different exit strategies that angel investors may use, such as an IPO (Initial Public Offering) or a sale of the company.

What are dividends?

Dividends are payments that angel investors receive from the company in return for their equity stake. The amount of dividends that an angel investor receives will depend on the company's profitability and the angel's equity stake in the company.

How to Land Funding From Angel Investors

4 min. read

Updated May 10, 2024

Are you wondering how to land funding from angel investors? Of course, any real answer depends on where you are and the specifics of your business.

This article focuses on angel investors in the U.S., and the process of raising angel investment for high-tech or high-growth startups. It’s different in most other countries—and almost impossible for established businesses without high potential for growth. 

We should also point out that angel investment is different from venture capital . People often use “ venture capital ” as a bucket term to include angel investment, but that’s unnecessarily confusing. Angel investment usually comes before venture capital, at earlier business stages. Venture capital usually comes after angel investment, for startups that continue to grow. 

Angel investors are a wide range of different investors, not as formally established as venture capitalist firms, and not as homogenous a group, either. An angel investor might be a successful business person, a wealthy individual, a group of professionals such as doctors or dentists, or a local investment club, or somebody else completely different. Your angel might be a rich uncle, for example.

Venture capital, on the other hand, is investment from formal venture capital firms that are run by professionals who invest other people’s money. 

Here are the basics of landing funding from angel investors:

• 1. Finish your business plan

If you haven’t already written a business plan , start now. Don’t write a 200-page document; keep it as brief and succinct as you can. We recommend using a Lean Planning approach .

You need a business plan for a few reasons:

• To help you estimate how much money you need
• To map the main priorities, milestones, financial prospects, strategy, and tactics
• To establish the numbers and key points you’ll want to highlight in summaries and pitches
• Eventually, to communicate with your investors—normally this happens during due diligence after your summaries and pitches have investors interested in learning more
• 2. Create your executive summary or one-page pitch

You need a compelling business plan executive summary to communicate with investors. Prepare a brief but exciting email, one page at most, outlining the growth prospects, type of business, and potential investor payoff. Prepare an investor summary memo or one-page business pitch . 

• 3. Look for potential angels

Consider Harold Lacy’s “six degrees of separation” method. Your angel might be somebody you know, recommended by somebody you know, or a local investment club, business person, perhaps even a local development agency.

Search your contacts. Lacy recommends that you ask everybody you know, not whether they want to invest, but whether they know anybody who might. You should also post on AngelList and Gust . 

Angel investors often focus on local markets, specific industries, and affinities such as college or university alumni. Your search should include looking for angel groups related to the college or university from which you graduated; your town, or state; and the industry you’re in. 

Use web search. Search for “angel investors in [your area]” or “angel investors [your type of business]” or “angel investors [your college or university] alumni.” 

• 4. Research your prospects thoroughly

This is no time for mail-merge or mass-emailing software. Angel investors are not a commodity and not generic. Never send untailored messages to angel investors you don’t know. 

Instead, you need to approach them professionally, having done your homework on each group or individual. Serious angel investors almost always have serious web footprints. Search for them on the web and find out about their background, writing, speaking, and especially their industry experience and past successes. 

 As a potential investor emerges, find out whether he or she prefers a phone call first, a meeting, a complete business plan, a summary memo, email, or whatever. First, however, you need to establish some interest.

• 5. Make sure you have a good relationship with an experienced attorney

You need the right legal help to make a real deal.

Make sure your attorney has been through similar deals; if not, then they should recommend a specialist instead. Investment deals are serious business.

If you don’t find anything, what’s next?

Think it over. Maybe the investment filter process is a good thing. You might try other means instead of angel investors. Generally, investors are looking for companies to invest in that have massive growth potential, and that have an exit strategy . They make the majority of their money when you sell your business. 

If you’d like to own your company for the foreseeable future, and/or you have a healthy, solid business with no real plans for large scale growth, you might be better seeking funding elsewhere. 

But, if you have an exit plan, traction in the market, and plans to scale your business, expand your network. Look for industry or trade events where you can meet others who have successfully landed angel investment, and potentially chat informally with potential investors to get a better sense of what they’re looking for. It can be helpful just to understand more about why your business fits (or doesn’t fit) an investor’s model for a good bet.

Tim Berry is the founder and chairman of Palo Alto Software , a co-founder of Borland International, and a recognized expert in business planning. He has an MBA from Stanford and degrees with honors from the University of Oregon and the University of Notre Dame. Today, Tim dedicates most of his time to blogging, teaching and evangelizing for business planning.

Table of Contents

• If you don’t find anything, what’s next?

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How to Structure Your Pitch Deck for Angel Investors

Startup investing is a high-stakes, highly competitive business. Angel investors and venture capitalists are constantly on the lookout for the next tiny startup that could strike it big. As savvy investors, however, they’re also attuned to potential issues and red flags that could dissuade them from funding your company.

The good news is that you can stand out from the crowd and make an excellent first impression by building a great pitch deck. But do you know how to create a pitch deck in the first place?

Your pitch deck is one of the most important elements when you prepare a pitch for angel investors . In this startup pitch deck guide, we’ll discuss everything you need to know.

How do you make a pitch deck for an investor?

Your first question might be: “What is a pitch deck?” In the field of angel investing , a pitch deck is a short yet informative presentation that lays out the basic details of your company. This includes your startup’s leadership team, mission, industry, products and services, high-level financials, growth strategy, and fundraising needs.

You can think of a pitch deck like a business card for your startup, soliciting interest in your company. Pitch decks provide all the high-level relevant information that potential investors need to know during the angel investment stage.

Importantly, the goal of a pitch deck is not to help you raise money—at least directly. Rather, a high-quality pitch deck will help get you to the next step: a seat at the meeting room table, where you’ll discuss funding with angel investors.

What should be in an investor pitch deck?

The role of the pitch deck is to quickly and concisely give potential investors an overview of your business. It should explain why they should fund your startup. However, there’s more to mastering the art of the investor pitch deck .

Although every startup is different, there’s a “language” that angel investors have come to expect from founder pitch decks. Your slides should contain various pitch deck building blocks that investors are looking for.

For one, most startup thought leaders recommend including a maximum of 10 to 20 slides. This allows investors to peruse it in just a few minutes. If your pitch deck is too short, you risk omitting crucial information. If it’s too long, you risk losing the investor’s attention. Including visually appealing images, graphs, and charts will also help sustain an investors’ interest throughout the presentation.

Instead of following a “one-size-fits-all” template, your pitch deck should be customized. Create different slides tailored to specific audiences. This enables you to easily swap your slides in and out to fit individual investors.

With all that said, what should you include in your startup pitch deck? Below are the essentials for how to create a pitch deck .

• Pitch deck cover: The start of your pitch deck should set the tone for what’s to come. A pitch deck cover should include your business name, logo, and contact information. It should also include a tagline and/or visual that effectively communicates your mission.
• Value proposition: Your value proposition is a short, high-level, one-sentence summary of the value that your company provides to customers. For example, saying that your startup is “Uber for X” (i.e. providing on-demand services from a mobile app) is a common value proposition.
• Business problem: Your business problem is the issue or gap in the market that your startup aims to solve. In the rest of the pitch deck, you will explain how your company is uniquely able to address this problem.
• Market opportunity: Even with a legitimate business problem, you need to prove that there is significant demand for the problem to be resolved. This slide should discuss your startup’s total addressable market (TAM), i.e. the potential revenue opportunity for your products and services.
• Solution: This slide showcases the products and services that your startup offers. In particular, discuss how customers can use these products to address the business problem.
• Business model: In this slide, explain how your company plans to make money from your products and services. It could be subscription fees, one-time purchases, advertisements, etc. 
• Financials: Although you don’t need to include a full tax form, your pitch deck should incorporate the crucial financial models for your startup. This may include your cash flow statement, income statement, and sales and growth projections.
• Competitors: Every business has its rivals, and a careful understanding of the market landscape is critical. This slide should discuss your closest competitors and why customers will patronize your business instead of theirs.
• Leadership: This slide is the place to mention key startup personnel such as founders, co-founders, and executives like the CEO, CTO, and COO. Mentioning your credentials and previous experience helps reassure potential investors that you have the skills to back up your business vision.
• Fundraising: Last but not least, your pitch deck should conclude with  the amount of funds your startup is seeking. You should also discuss how you plan to use these funds (e.g. hiring new employees or developing a new product).

How do you pitch an angel investor?

Sending out your startup pitch deck is the first stage in pitching an angel investor. Typically, your deck should be attached to a brief message (e.g. through email, LinkedIn, or the investor’s website) that succinctly presents your case without directly asking for funding.

If your pitch deck is well-written enough to generate interest, the next step is for investors to reach out to you for a one-on-one meeting. This meeting should further build on the themes outlined in your deck. This includes the business problem, the market opportunity, your business solution and products, your financial models, etc. Put forth a concise and winning argument for investing in your startup, and be sure to leave time at the end for Q&A.

Presenting to VCs and angel investors is its own skill, and you may need to go through many presentations and meetings before you get a nibble of interest. Once an investor wants to move forward, the next step is to go through the due diligence process. During this stage, investors may assess your company in terms of factors such as:

• The competency of the management team.
• The quality of your products and intellectual property.
• The long-term potential and market opportunities for your startup.
• The underlying assumptions of your company’s financial models.
• The risks and competitors that your startup faces.
• The possible exit strategies for your startup.

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How to attract angel investors to your startup business

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Looking for funding for your business? Discover how you can attract angel investors and learn why a strong business plan will help.

Are you looking to grow or scale your startup business?

Have you got a big order on the cards and need the funds to fulfil it?

Perhaps you want to develop new products and services, and require a cash injection to make it a reality.

If you require funding for your business, one option is angel investment.

But that might leave you with the question, how to attract angel investors for my startup?

In this article, we highlight what’s required so you’ve got the best chance of finding investors and getting the funding you require.

Here’s what we cover:

What is angel investment?

What do angel investors look for in a startup, how to attract angel investors, final thoughts on attracting angel investors.

Download your free small business toolkit: a guide, business plan template and cash flow forecast template so you can manage your business effectively

Angel investment is a process by which a private individual or investor puts money into a business in exchange for ownership equity.

Angel investors go by many names, including seed investors, private investors, angel funders and informal investors.

The term ‘angel’ comes from the early days of the Broadway district in New York City when wealthy individuals who often helped raise money for theatrical productions were called angels for saving the shows.

In business, a good example of a well-known angel investor is Mark Cuban, the owner of the Dallas Mavericks, a tech pioneer, and a major media investor worth an estimated $4.6bn .

Angel investors inject funds into promising startups that need capital to get off the ground.

The amount offered by angel investors can range from five to six-figure sums , but can even reach the millions depending on the business proposition.

Angel investors may sometimes form networks called angel groups, where they combine their resources and invest in promising businesses as a group.

Pros of using angel investment

There are many benefits of partnering with angel investors, including the following:

• They provide alternative funding to loans from banks and other financial institutions, which are sometimes hard for new businesses to qualify for.
• They may provide entrepreneurial expertise, coaching and guidance to help your business succeed.
• If your business growth is evident, you can establish a long-term partnership with angel investors, which might make it easier to win further financial support beyond the early stage investment.
• With angel investment, you don’t have any debt to pay since you give away part of your company equity or shares in exchange for capital instead. Some angel investors offer loans that are later converted into ownership equity.

Cons of using angel investment

The potential downsides of angel investment that you should consider include:

• As industry experts/shareholders, angel investors may have a different opinion or approach to your business goals and decisions, which may clash with your preferred business growth trajectory.
• Their expectation of seeing a return on investment (ROI) on the dot can put pressure on you and your team.
• While you exchange your company’s equity for financial investments, you – to some extent – dilute your ownership and limit intuitive control over your company.

Angel investors often go beyond your pitch to evaluate the long-term sustainability of your business before transferring the funds.

Here are a few of the most important things angel investors want to see before they invest in your venture.

A business that’s easy to understand

The angel investment industry has become quite competitive. Private investors are in high demand, so don’t expect anyone to spend their time on a startup that has a vague or unclear business idea.

Angel investors are looking for clearly defined and viable business ideas with the potential to offer a good return on investment.

Similarly, angel investors are more likely to invest in businesses with a good reputation. Getting funding is hard if, for example, your business is prone to legal troubles along the way.

You also need a solid contingency plan for your business. It’ll demonstrate to potential investors how your business is prepared to face any economic or global challenges that may arise.

A strong leadership team

Angel investors are more likely to invest in a startup with a strong management team .

You’ll need to demonstrate that you have a robust team behind your company when attracting angel investors.

Investors are looking to invest in companies that are managed by people who have the right expertise and experience in the relevant industry.

The management team should be proficient in diverse areas of business, including product or service development, marketing, sales and accounting.

Your team should also demonstrate high levels of competency and trustworthiness. A solid leadership team will create a positive impression in the angel investor’s mind.

Clear financial projections

Angel investors need clear financial projections demonstrating how the business is expected to perform, alongside how their investment is expected to grow and generate good returns.

Therefore, you’ll need credible financial projections before sitting with your angel investor.

Be realistic about your valuations. If possible, consider hiring the services of an accountant to help you create and present your financial projections.

A strong and viable sales pipeline

Angel investors want to know if people are willing to buy what your business sells. They’re looking for proof that you have a large potential market.

Consider providing a record of sales you have made so far and showing your potential investors how you plan to build and expand your sales pipeline, generate more income and scale the business.

Remember that, industry experts or not, angels investors are keen to see a well-executed sales pipeline. They’ll also want to see how your products or services stand out from the competition.

Angel investors do a lot of due diligence before handing over any money.

But how do you attract them? Some top considerations are:

Present a convincing elevator pitch

An elevator pitch is a strong introduction often presented in the shortest time possible (or the time you’d take to ride an elevator).

It’s a personal introduction you use to communicate what your business is about and how it will add value.

To boost your chances of success, it must include:

• A quick personal introduction that includes your name, your business and your position in the company
• The problem your potential customers are having and how your business idea will solve the problem
• The exciting market opportunity and how you plan to seize it
• The competition and how you plan to overcome it
• Your important business milestones and achievements

Have a strong and clear business pitch

Angel investors invest in businesses that provide financial rewards.

Your business pitch must give them a clear understanding of your business model, an overview of your financial projections, how much money you’ll need, how you plan to use the funds, and a strategy that details how the investor will get their money back with a profit.

In addition, describe how you intend to overcome challenges and risks that your business could potentially encounter in the future.

Present all of the information clearly and concisely.

One important fact to remember is to keep the pitch tailored to the investor’s preference and interest. Researching their background (previous investments, risk tolerance, etc) will help you connect and resonate with them better.

Find the right investors for your business

Angel investors can play a major role in the success of a fledgling business. However, not every investor will fit your type of business.

You need to research and find an angel investor who shares your goals and vision for your company.

You also want to partner with a trustworthy investor with a good track record of successfully supporting other companies.

A good angel investor should provide capital and useful connections and other resources you need to succeed.

Also, do your due diligence and check that the investor is financially capable of supporting your business growth plans, especially if you’re looking for a long-term partnership.

Have a comprehensive business plan

A good business plan is important when you want to get angel investment for your company.

Make sure it includes your business model, financial projections, marketing strategy, management team and details of how you plan to conquer the market amid the existing competition.

The plan should also indicate how you plan to scale the business over time.

Angel investors look for realistic, serious and detailed business plans. They’ll also want to see how committed you are to it.

Download your free business plan template

Create a strong network

If you’re looking to attract investors, one way to do that is to create a strong network. And it can work in two ways.

On the one hand, as you build your network, people within it might be able to introduce you to angel investors they either know or have worked with.

On the other, you could find that an investor reaches out to you after hearing your story from a mutual acquaintance.

So use your personal network to showcase your business and its potential to grow to angel investors.

You can take advantage of many networking opportunities to meet investors and grow your connections, including at business conferences and events, and online channels too.

And besides helping you meet angel investors, networking also connects you to other existing businesses you can learn from.

Angel investors provide a great opportunity for businesses to get capital and support from expert advisers. And modern technology is making it easier to locate, meet and pitch to angel investors than ever before.

If you have a solid startup idea, it’s worth reaching out to reliable angel investors to help you get your business off the ground.

But clearly understanding what angel investors look for in a business and how to attract them before you send your first investment pitch is also important.

Remember, angel investors aren’t only financiers but mentors and advisers too. They’re people with the funds required to help startups like yours succeed.

So follow the steps in this article, work on your pitch and make sure your business plan is sound to increase your chances of attracting angel investors that will provide the funding you require to help your business thrive.

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What angel investors want to see in a startup’s business plan

How to write a business plan: advice from the experts.

Show off your personality

“Angels are investing in fairly early-stage businesses so the business plan is largely aspirations rather than accomplishments,” says Colin Mason , Professor of Entrepreneurship at the University of Glasgow’s Adam Smith Business School.

“This means that angels are investing in people rather than in the business – i.e. they are betting on the jockey rather the horse.

“A business plan must show the investor’s thinking and vision for the business.”

A business plan is as important as the pitching deck

“It is vital,” says Nick Lyth , CEO of Green Angel Syndicate.  “In the first place, it is a description of where the business is aiming to go, and how it intends to get there. 

“In the second place, it exposes the quality of the management team, its professionalism, knowledge of its market, and attention to the detail required in order to succeed.”

Keep things concise

“There should be no more than 20 pages,” says Roderick Beer , Managing Director of the UK Business Angels Association. 

“Investors read a lot of business plans. If you can’t get across your idea in a clear and concise way in 20 pages then you might have bigger problems. 

“You can always use appendices to include more information in supporting evidence.”

Use plain English

“A business plan need to be dry and factual, but it also needs detail to signal deep understanding,” says Professor Mason.

“But if the startup is a technology business then the science has to be understandable to a non-specialist.”

Include the essentials

All business plans need the following sections: an overview; products/services; achievements or traction; route to market; the team; future milestones; financing requirements; financing projections and risk analysis.

“From an investor perspective the most important sections are probably the team, the traction, and the financials,” says Beer.

“Executive summaries in business plans aren’t that important because before an investor gets to the business plan they are more than likely to have looked through the investment deck which is in its own form a summary.”

Be positive, but realistic 

“Overpromising is a bad strategy,” says Simon Thorpe , Chair at Cambridge Angels. “You tend to come unstuck very quickly. The timetable is always longer than an entrepreneur thinks.

“The thing we know about projections is that they will be wrong. We don’t want to see ridiculous assumptions, but we want to see an understanding of the metrics of a business.

“It’s important to show off several scenarios for your business. Consider the best, medium and worst case scenarios.”

Show you’re special – but you don’t have to be unique

“Angels are not interested in ‘me too’ businesses,” says Mason.  “They want to know what specific problem or ‘pain’ the business is addressing – and they are looking for ‘migraines’ rather than simply 'headaches' that can be solved by an aspirin.

“They want to know what's the competition and what the startup offers that is different from current solutions. But they are sceptical, so claiming uniqueness can be a turn off!”

Show the angels what you have already achieved

“Clear evidence of demand and market penetration are very encouraging,” says Lyth. 

“For example, a company recently pitched with a product aimed at the mainstream grocery supermarket sector, and had already secured listings and endorsement from Tesco. This was great for us.”

Research your angels

“I recently had an approach from someone who had done all his homework on me, knew a lot about me and what I did, and that meant I was immediately much more interested,” says Thorpe .

“There was another business proposal that I didn’t like but what piqued my interest was that it was an area of interest to me. So we had a chat and he was able to come back with a proposal more relevant to me.”  

Neelam Patel , CEO at MedCity Angels, agrees: “It’s definitely worth researching your audience. What they are interested in, what have they invested in before and how much. 

“When in doubt, keep it general and accessible and go into details as and when asked.”

Check if the angel has special interests

As Lyth explains: “Any company approaching Green Angel Syndicate looks foolish if it does not recognise that we specialise in the fight against climate change and global warming. It must take account of this and aim to sell itself to us on the basis of its contribution to that fight.

“It simply looks incompetent and unprofessional otherwise. It discourages belief that it will be able to assess its customers effectively, and run a decent sales campaign.” 

Get a second opinion

“A family member can be really helpful for feedback before you show the business plan to an angel,” says Beer.

“An investor needs to be able to understand your business and how you intend to make a success of it and it needs to be easy to understand and easy to read and so testing it on a reasonably intelligent family member is a good way forward. 

“Certainly get someone that’s not on the inside of the business to review it because we often see cases where the founder can’t see the wood for the trees.”

Think like an investor

“The best business plans make you want to know more,” says Patel . “They make you wonder: what’s next, and keeps answering the questions popping into your head. 

“Being able to anticipate the investor’s next questions is a feature of a good business plan.”

Consider the impact of Covid-19

“Angels are still investing,” says Mason . “But many are preserving their cash for follow-on investments rather than making new investments. 

“Covid-19 has altered the sectoral preferences of angels – some are very open to businesses that are addressing opportunities that it has created.”

Thorpe says that the pandemic has not significantly altered his interests. “We’re still investing in the same areas. But the coronavirus has accelerated the adoption of technology, especially in health and education. 

“The other big theme is the growth of e-commerce. You don’t have to be an Amazon to be part of it. A lot of businesses out there support the likes of Amazon.” AI and Big Data, he says, are also key focuses for angel investors.

Cambridge Angels has taken on 13 new companies since January 2020.

Raising Angel investment in the current landscape

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How To Get Angel Investors To Fund Your Business Idea

You are going to change the world with your incredible new business idea. You have drawn all the plans in your head, conducted all the market research, and are sure of an industry takeover. The only thing holding you back is funding. One viable option to secure this is through an angel investor business plan.

An angel investor is a high-net-worth individual who provides capital for a startup, usually in exchange for an equity stake in the company. As a result, they have heard millions of “million-dollar pitches,” and have gone through thousands of business plans claiming to be the ultimate solution to just about every problem imaginable.

A seasoned angel investor knows that ideas on their own are not worth much and that the first major step in determining the viability of any business is the quality of its business plan.

Thankfully, the internet has made information very accessible, and with a quick google search, you can get thousands of templates and information on how to build a “winning” business plan. However, this begs the question: if this information is so easily accessible, why does research show that less than 1% of startups get funded by angel investors?

While a lot of these online articles and templates are quite helpful, most of them come from sources that have no real-life, practical experience with crafting fund-attracting business plans. At Joorney, we have experts with practical startup experience who have produced business plans, pitch decks, and other documents that have helped our clients raise millions in funding and achieve other business goals.

If your business is to stand any chance at getting funding from angel investors, these are some tips you need to incorporate into your business plan today.

The Critical Elements Angel Investors Look For

In every business an angel investor examines, they are looking for crucial qualities that show the company knows what it’s doing, understands the market it’s operating in, and can mitigate potential risks. In particular, investors are looking at a handful of critical elements that show that the business is worth investing in.

When drafting a business plan for angel investors, you must note that the primary objective is to grow their wealth and see a return on investment. If your business plan does not clearly show how your business will make money for the investors, you are setting yourself up for failure.

Your business plan should succinctly indicate your startup’s cash flow and other financials and make clear the return the investor can expect and when. This is an area investors evaluate seriously and spend a lot of time brooding over, so be thorough when planning this.

Purpose & Passion

Obviously, investors want to make money but that’s not the only reason they invest, and they know full well not every investment will succeed. Many angel investors are willing to take chances on projects that have potential but don’t ultimately give a positive rate of return.

According to a report published by Wharton Entrepreneurship, only 40% of angel investors exits in 2017 showed a positive return on investment. What this tells us is that many angel investors look at the passion behind a project before investing in it, not just its profitability potential. If an investor finds a project that resonates with them personally, they’re likely to invest in it and take a risk.

Market Knowledge

Knowing your market is essential in securing funding for your burgeoning business. You should clearly show your angel investors the full potential of the market which your startup plans to engage. This will require you to conduct extensive research and present meaningful insight into your market.

This includes things like the size of the market, the market segments, your product’s niche in that market or industry, the growth prospects that are available in that market, new trends and technologies, and any barriers to entry. Make it clear in your business plan that you fully understand the opportunities as well as the barriers and risks and that you have plans to address them.

Concrete Management Principles

Management can make or break a small business or a startup. This relationship between leadership and success means that investors are always concerned that their funded enterprises have the right management team. Since investors are pouring money into a business, they expect regular reports on the enterprise’s health and growth.

To this end, a well-rounded management team that combines research, sales, accounting, manufacturing, and human resources is what these investors seek out to know all main areas of the business will be tended to correctly.

Traction & Early Success Indicators

One great way to ensure investor attraction is to prove your product can be successful by showing evidence of past achievements. This demonstrates the ability of your business to follow through on its ideas and show them where your business is headed.

While angels often take chances at earlier stages, the majority of investors consider a business with some traction because it minimizes the risk involved. Be sure to give details of all revenue streams as well as any potential deals that have been secured so that they can see the bigger potential of your business.

Opportunity to Interact with the Business

Some investors are hands-off, allowing the company to get on with their business without interference. Others, however, prefer to have a more active hand in how the company operates. This intervention could be a blessing in disguise, especially if the investor is passionate about the project and has experience in similar types of business in the past. Their advice could be crucial to help the company grow and prosper.

Entrepreneurs may want to include how much involvement they expect from their investors within the business plan. This clear statement allows everyone to understand the expectations and roles of the investor.

A Valid Exit Strategy

Before angel investors sign off on an investment, they prefer knowing that they have a viable way to exit the investment when the time comes. If you’re looking for angel investors to fund your enterprise, you have to give them a chronological expectation for when they can reap their rewards. Not giving them a time-frame or criteria under which to exit the investment is a red flag that would drive off many angel investors.

How to Craft a Complete Business Plan

If you cover all of the elements above in your angel investor business plan, you will be well on your way to securing funding. However, you still need to make sure that the business plan is organized structurally and follows a predictable, logical order. While there are variations depending on the business model and other factors, this is the standard format we follow at Joorney:

•     Objective
•     Products or Services Offered
•     Market Analysis
•     Sales and Marketing Plan
•     Operations Plan
•     Structure of the Business
•     Management Team Background
•     Financial Overview
•     SWOT Analysis
•     Capital Requirements

Developing a Business Plan Angel Investors Will Be Interested In

Joorney has delved into the requirements of business plans and has experience in covering all the critical aspects of business plans for angel investors. As startups and small businesses compete for funding, proper consideration of the crucial elements needed to convince them to invest becomes more prominent.

Hopefully, with the right advice and guides, more companies can tap into the investor funding they need by focusing on the vital factors investors look for before funding a business. Contact us today to help you craft an investor business plan that will attract the attention of angels, or a pitch deck to get your foot in the door.

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Angel Investors Strategic Plan Template

• Great for beginners
• Ready-to-use, fully customizable Subcategory
• Get started in seconds

As an angel investor, strategizing your investment approach is crucial for success in the competitive world of startups. With ClickUp's Angel Investors Strategic Plan Template, you can streamline your decision-making process and ensure you're investing in the right opportunities.

This template helps you:

• Analyze investment opportunities and evaluate their potential returns
• Establish investment criteria to guide your decision-making
• Identify target industries and sectors that align with your investment goals
• Set financial objectives and track your progress towards them
• Outline the necessary steps to achieve a diversified and successful investment portfolio

Make smarter investment decisions and maximize your returns with ClickUp's Angel Investors Strategic Plan Template. Start investing with confidence today!

Benefits of Angel Investors Strategic Plan Template

Creating a strategic plan using the Angel Investors Strategic Plan Template can provide angel investors with numerous benefits, including:

• Streamlining the investment process by having a clear roadmap to follow
• Identifying the most promising investment opportunities based on predetermined criteria
• Minimizing risks by conducting thorough industry research and analysis
• Setting realistic financial goals and tracking progress towards achieving them
• Enhancing communication and collaboration among angel investors and stakeholders
• Maximizing return on investment by making informed and strategic investment decisions
• Adapting to market changes and making necessary adjustments to the investment portfolio
• Increasing confidence in investment decisions through a well-defined and comprehensive plan.

Main Elements of Angel Investors Strategic Plan Template

Investment planning for your startup can be challenging, but ClickUp's Angel Investors Strategic Plan template has got you covered!

• Custom Statuses: Easily track the progress of each task with statuses like Cancelled, Complete, In Progress, On Hold, and To Do.
• Custom Fields: Utilize 8 custom fields such as Duration Days, Impact, Progress, Ease of Implementation, and more, to capture crucial information about each investment opportunity.
• Custom Views: Choose from 6 different views including Progress, Gantt, Workload, Timeline, Initiatives, and Getting Started Guide, to visualize and manage your strategic plan effectively.
• Project Management: Collaborate seamlessly with your team by assigning team members, setting project leads, and organizing tasks by department. Plus, use additional features like dependencies and milestones to streamline your investment process.

How to Use Strategic Plan for Angel Investors

If you're looking to attract angel investors for your startup, having a strategic plan is essential. Follow these steps to effectively use the Angel Investors Strategic Plan Template in ClickUp:

1. Define your goals and objectives

Before diving into the template, it's important to clearly define your goals and objectives for your startup. Consider what you want to achieve with the investment, whether it's scaling your operations, launching a new product, or expanding into new markets. This will help guide your strategic plan and make it more appealing to potential angel investors.

Use Goals in ClickUp to set specific, measurable, and time-bound objectives for your startup.

2. Conduct market research

To create a compelling strategic plan, you need to understand your target market and industry trends. Conduct thorough market research to identify your target audience, competitors, and any gaps in the market that your startup can fill. This will help you position your business as a unique and valuable investment opportunity for angel investors.

Use the Gantt chart in ClickUp to plan and track your market research activities.

3. Develop a comprehensive business plan

Angel investors want to see a detailed and well-thought-out business plan that outlines your startup's vision, mission, target market, competitive advantage, revenue model, and growth strategy. Use the Angel Investors Strategic Plan Template in ClickUp to structure your business plan and ensure that you cover all the essential elements that investors look for.

Use the Board view in ClickUp to organize and visualize the different sections of your business plan.

4. Highlight financial projections and return on investment

Angel investors are primarily interested in the potential return on their investment. Include financial projections that demonstrate the revenue and profit potential of your startup over a specific period of time, typically three to five years. Show how the investment will generate a significant return for the investor and explain any assumptions or factors that contribute to your financial projections.

Use the custom fields in ClickUp to track and calculate your financial projections, such as revenue growth rate, profit margin, and ROI.

By following these steps and utilizing the Angel Investors Strategic Plan Template in ClickUp, you'll be well-equipped to attract angel investors and secure the funding needed to take your startup to the next level. Good luck!

Get Started with ClickUp’s Angel Investors Strategic Plan Template

Angel investors can use the Angel Investors Strategic Plan Template to develop a comprehensive strategy for their investment portfolio and ensure they make informed decisions.

First, hit “Add Template” to sign up for ClickUp and add the template to your Workspace. Make sure you designate which Space or location in your Workspace you’d like this template applied.

Next, invite relevant members or guests to your Workspace to start collaborating.

Now you can take advantage of the full potential of this template to create a successful investment strategy:

• Use the Progress View to track the progress of each investment opportunity and monitor its performance
• The Gantt View will help you visualize the timeline of your investments and identify any overlapping tasks or delays
• Use the Workload View to distribute tasks among team members and ensure a balanced workload
• The Timeline View will provide you with a visual representation of your investment milestones and deadlines
• Use the Initiatives View to set clear goals and outline the steps needed to achieve them
• The Getting Started Guide View will provide you with a step-by-step guide on how to use the template efficiently
• Organize tasks into five different statuses: Cancelled, Complete, In Progress, On Hold, To Do, to keep track of progress
• Update statuses as you move through the investment process to keep stakeholders informed of progress
• Monitor and analyze tasks to ensure maximum productivity and success in your investment portfolio.

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How to Pitch to Angel Investors: The Practical Checklist

All startups will eventually need to seek outside capital at some point in their startup journey. Partnering with angel investors can be a great way to get the funds you need to grow your business. To secure capital, you need to find an angel investor who can see potential in your startup by persuasively presenting your idea.

Setting up meetings and pitching your dream to angel investors is intimidating, no matter how you put it. You've put a lot of work into building your startup, and you're ready for the next phase. You just need the funds and some resources.

Once you secure that first meeting with an angel investor, you only have a short period of time where you can pitch your idea and impress potential angel investors to compel them to invest in your startup. This practical checklist will help you to understand how to best pitch to angel investors to secure the funding you need quickly.

What is an Angel Investor?

Angel investors are individuals who come from the business world and are often small business owners themselves, professionals, company executives, and more. They have a high net worth and the money to invest and are always looking for a new opportunity to make a significant return. Angel investors offer promising startup funding, especially in the early stages of development, in exchange for equity in the company.

Where Do You Find Angel Investors

When you're ready to bring angel investors to your startup, you have to find them first. If you're not already connected, you need to know where to start. There are a lot of platforms available that make finding angel investors seamless. Here are a few places you can start.

Online Platforms 

Networking events , social media , the practical checklist for how to pitch to angel investors to secure funding.

Pitching to angel investors can be tricky. Your business may not be fully established or have a strong customer base just yet. But pitching involves selling your startup through numbers, passion, and drive. You want to build a pitch deck that highlights who you are, the details of your startup, and what you intend to accomplish, all within a short timeframe. Here's everything you need to know to pitch to angel investors and secure that funding.

Learn about their accomplishments, any startups they've invested in previously, and their background. The more information you can gather, the more you can understand what excites them about investing in startups.

You want to consider who you are getting up in front of with every presentation. What are they looking for in an investment opportunity? Who have they invested in before? Are there any attributes they prefer in a business partner? You can use what you find to update and customize your pitch to better fit each angel investor's preferences. That way, you can improve your odds your pitch will resonate with more investors giving you a real chance to secure funding.

When you're a founder, you're a leader. You'll need to speak to many important people, including investors, your employees, and customers. You want to deliver your messages with confidence. Improving your public speaking skills is the ability to focus on commanding a room and grabbing attention using the tone of your voice, your body language, visual aids, and more. Improving your public speaking will allow you to confidently deliver your pitch and help you prepare for the unexpected, such as detailed questions or initial concerns.

Learn From Your Mistakes  – Not every pitch is going to go well, and there will be some that you will outright bomb. Think about questions you weren't prepared to answer. Maybe they misunderstood or didn't quite see the value based on your presentation. Most important is that you learn from your mistakes and work to improve your flaws to ensure the next one is better.

You'll have to pitch to many investors to get the capital you need to build your business. Polish that pitch deck, ask for feedback, and be authentic. You can help ensure your success by following this practical checklist to get you ready to knock your pitch out of the park.

When you're ready to start on your journey to find the perfect investor, it can be overwhelming. Get the help you deserve to get your startup off the ground. Angel Match can match you with over 90,000 angel investors and venture capitalists in one place. Learn more about how Angel Match works  here .

✓ Access a dashboard of 100,000+ investors

✓ Search for venture capital investors

✓ Search for angel investors

✓ Locations

✓ Social media profiles

✓ Investment interests

✓ Phone numbers

✓ Investment stages

✓ Past invesments

Angel Match is the easiest way to research investors for your startup so you can spend less time Googling and more time raising.

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Table of contents

Who are Angel Investors?

Why are angel investors important, examples of angel investors, angel investors vs. venture capitalists, how do angel investors operate, benefits of angel investing, angel investing risks, wrapping up, angel investing frequently asked questions.

Academy Center > Trading

What Is an Angel Investor?

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When it comes to securing funding for a new, innovative idea, entrepreneurs have a number of options. Angel investors play a significant role in the startup-finance ecosystem alongside banks and venture capitalists.

By understanding the value they bring and learning how to effectively engage with them, entrepreneurs can unlock the potential for startup success. And for investors, angel investing is an excellent opportunity for anyone looking to put their money to work in a way that aligns with their values.

While angel investing offers numerous benefits for entrepreneurs, it also comes with its fair share of risks. This article will explore both the advantages and challenges faced by angel investors, as well as provide valuable tips on how to mitigate risks and maximize their chances of success.

Whether you’re an aspiring entrepreneur or an investor looking to make a difference, read on to learn about these financial powerhouses.

Angel investors are high-net-worth individuals or groups who provide financial backing to startups in exchange for equity or ownership stakes in the company. These investors are typically high-net-worth individuals who have accumulated wealth through their own entrepreneurial endeavors or other successful ventures. Unlike venture capitalists, who typically invest funds from third parties, angel investors use their personal wealth to support early-stage businesses. They not only bring financial resources to the table but also offer their expertise, industry connections, and mentorship to help startups succeed.

Angel investors are often successful entrepreneurs themselves, having been through the startup journey and achieved notable success in their own ventures.

There are two main types of angel investors:

Individual Investors

Individual angel investors are wealthy individuals who invest their own money in startups. They may have a specific industry focus or invest across diverse sectors.

Angel Investment Groups

Angel investor groups, also known as angel networks or syndicates, are composed of multiple individuals who pool their resources and collectively invest in startups. These groups provide a platform for angel investors to share expertise, collaborate on due diligence, and diversify their investment portfolios.

Angel investors provide crucial financial support and guidance to fuel innovation and drive growth in the startup world. Entrepreneurs often face significant challenges when it comes to securing the necessary funds to turn their ideas into reality. 

Traditional lending institutions may be hesitant to invest in unproven ventures, making it difficult for entrepreneurs to access the capital they need. This is where angel investors step in, filling the funding gap and offering much-needed support to promising new businesses.

Some of the most successful angel investors in the world have made their mark in Silicon Valley, the global hub of innovation and entrepreneurship.

Peter Thiel , co-founder of PayPal, has become an influential angel investor, providing early-stage funding for companies like Facebook and Airbnb.

Ron Conway , known as the “Godfather of Silicon Valley,” has a vast portfolio of successful investments in companies such as Google, Twitter, and Pinterest.

Angela Lee is a prominent female angel investor known for her contributions to the startup and angel investing ecosystem. She is also the founder of 37 Angels, an angel investment network focused on increasing diversity in angel investing.

Marc Andreessen , co-founder of Netscape and later a prominent venture capitalist, also began his investing career as an angel investor, supporting companies like Twitter and Pinterest.

Monique Woodard is known for her investments in early-stage tech startups. Some of her investments include Mayvenn, an e-commerce platform for hair extensions primarily targeting Black women, and Partake Foods, a company that makes allergy-friendly snacks.

As with the examples above, many angel investors are often industry experts in their own right. They have deep knowledge and experience in specific sectors and can provide valuable insights and guidance to entrepreneurs. Their expertise goes beyond financial investment, and these angel investors play a pivotal role in shaping the startup ecosystems as they can offer strategic advice, connect startups with key industry players, and help navigate regulatory landscapes.

It’s important to note that angel investors differ from venture capitalists in several ways.

While both provide funding for startups, venture capitalists typically invest larger amounts of money and focus on companies that have already gained some traction and demonstrated potential for rapid growth. Angel investors, on the other hand, invest at an earlier stage and are more willing to take risks on unproven ventures. They often invest in startups before they attract significant attention from venture capitalists or other institutional investors.

Angel investors are vital to the startup ecosystem as they provide the necessary capital and expertise that can be instrumental in turning innovative ideas into successful businesses.

In the following sections, we will explore how angel investors operate, the criteria they consider when investing, the benefits and risks associated with angel investing, and valuable tips for entrepreneurs seeking angel investment for their startups.

Angel investors combine their financial resources with their expertise and industry connections to support startups. Successful angel investors possess certain characteristics that contribute to their ability to identify promising startups and make wise investment decisions.

One of the key aspects of angel investing is the investment criteria that is considered when evaluating potential startups. While each angel investor may have their own specific preferences and priorities, there are common factors that influence their investment decisions. Firstly, they have a keen eye for innovation and are passionate about supporting groundbreaking ideas that have the potential to disrupt industries. They are not afraid to take calculated risks and understand that failure is an inherent part of the startup journey.

Angel investors look for startups with high growth potential, innovative ideas, and a strong founding team. They want to see a clear market opportunity and a scalable business model that can generate significant returns in the long run.

Step 1. Alignment

In addition to evaluating the startup’s potential, angel investors also consider the alignment of their own expertise and interests with the startup’s industry or sector. Angel investors often invest in areas where they have deep knowledge and experience, as they can provide more valuable insights and support to startups operating in those sectors. This alignment also helps angel investors make more informed investment decisions.

Step 2. Finding Opportunities

To connect with startups, angel investors often leverage angel investor networks and platforms. These networks, such as AngelList, Gust, and SeedInvest, provide a platform for startups to showcase their ideas and connect with others in the space – both entrepreneurs and investors. These platforms allow angel investors to browse through a wide range of startups, filter them based on their investment criteria, and reach out to those that align with their interests.

Step 3. Due Diligence

Once angel investors identify potential investment opportunities, they conduct a thorough due diligence process. This process involves evaluating the startup’s business plan, financial projections, market analysis, competitive landscape, and the expertise of the founding team. Angel investors may also seek references, conduct background checks, and verify the startup’s legal and intellectual property status.

Negotiating terms is another critical aspect of angel investing.

Step 4. Negotiation

Angel investors and startups negotiate the investment amount, equity stake, valuation of the company, and other terms that will govern their relationship. It’s important for both parties to find a fair and mutually beneficial agreement that aligns with their respective goals. Angel investors aim to secure a reasonable equity stake that reflects the risk they are taking and the value they bring to the startup.

It’s worth remembering that angel investors not only provide financial support but also bring their expertise and industry connections to the table. They often take an active role in mentoring and guiding startups, leveraging their experience to help entrepreneurs navigate challenges and make strategic decisions. Angel investors can provide valuable advice on product development, marketing strategies, scaling operations, and even introductions to potential customers, partners, or other investors.

Angel investing offers numerous benefits for both entrepreneurs and investors. However, it also comes with its fair share of risks and challenges. Understanding the potential advantages and drawbacks of angel investing is crucial for both involved parties.

Angel Investment Benefits

• High Potential Returns: Angel investors have the opportunity to earn significant returns on their investments if the startups they back succeed. This potential for high profitability can be a major draw for investors looking to grow their wealth.
• Diversification: Angel investing allows investors to diversify their investment portfolios. By spreading their investments across multiple startups, they can reduce risk and minimize the impact of losses from any single investment.
• Early Access to Innovation: Angel investors often get early access to cutting-edge technologies and innovations. This not only provides the chance for substantial financial gains but also allows them to stay at the forefront of emerging trends.
• Tax Benefits: In some regions, angel investors may benefit from tax incentives or credits that reduce the overall tax burden. These incentives can make angel investing even more attractive from a financial perspective.
• Satisfaction of Supporting Entrepreneurs: Angel investors often find fulfillment in knowing that they are helping promising entrepreneurs bring their visions to life. This sense of contributing to the growth of innovative businesses can be personally rewarding.
• Networking Opportunities: Angel investing provides opportunities to network with other successful investors, entrepreneurs, and professionals in various industries. These connections can open doors to new investment opportunities and partnerships.
• Learning and Growth: Being an angel investor involves continuous learning and staying informed about market trends and startup dynamics. For investors who enjoy intellectual challenges, this aspect of angel investing can be particularly appealing.

Potential Returns and Exit Strategies for Angel Investors

While angel investors take on higher risks, they also have the potential for significant returns on their investments. If a startup succeeds and achieves substantial growth, angel investors can benefit from:

• Capital Appreciation: As the startup grows and increases in value, the angel investor’s equity stake appreciates. If the company achieves a successful exit event, such as an acquisition or initial public offering (IPO) , the investor can realize substantial financial gains.
• Dividend Payments: In some cases, startups may generate profits and distribute dividends to their shareholders, including angel investors. These periodic payments can provide a steady stream of income for the investor.
• Portfolio Diversification: Angel investors often create a diverse portfolio of investments to spread their risks. By investing in multiple startups, they increase their chances of backing a successful venture, which can outweigh any losses incurred from unsuccessful investments.

However, it’s important to acknowledge the risks associated with angel investing:

• High Failure Rate: Startups have a high failure rate, and angel investors must be prepared for the possibility of losing their entire investment. Many startups face significant hurdles in their early stages, including market challenges, competition, and operational issues.
• Liquidity Constraints: Unlike traditional investments, angel investments are typically illiquid. It may take several years before an investor can realize a return on their investment, either through a successful exit event or secondary market transactions.
• Dilution of Ownership: As startups grow and attract additional funding, the angel investor’s equity stake may become diluted. This means that their percentage ownership in the company decreases, potentially reducing the impact of their investment on future returns.
• Time and Effort: Angel investing requires time and effort for due diligence, monitoring investments, and providing ongoing support to startups. Angel investors must be prepared to dedicate their resources and expertise to support the companies they invest in.

Despite these risks, many angel investors are driven by their passion for innovation and the desire to make a positive impact on the startup ecosystem. By mitigating risks, conducting thorough due diligence, and leveraging their expertise, angel investors can increase their chances of success and contribute to the growth and success of promising startups.

Angel investors provide crucial financial support, expertise, and mentorship to early-stage startups, bridging the funding gap and fueling innovation and growth.

However, it is essential to acknowledge the risks involved, including the high failure rate of startups and the potential dilution of ownership for angel investors.

Taking steps to understand how many startups are funded and helped to grow ensures investors are more likely to spot great early-stage opportunities to add to their portfolios.

Q. What are the challenges and benefits of seeking angel investment versus bootstrapping a startup with personal savings?

Answer: Seeking angel investment can provide startups with much-needed capital to accelerate growth and scale quickly. However, it comes with the challenge of giving up equity and potentially ceding some control over the company. Bootstrapping with personal savings allows for greater independence but may limit the speed of growth due to resource constraints.

Q. How do angel investors evaluate the scalability and growth potential of a startup’s business model?

Answer: Angel investors assess scalability by examining a startup’s market size, revenue potential, and ability to expand its customer base efficiently. They also consider factors like the uniqueness of the product or service and the startup’s competitive advantage. A well-defined growth strategy and a capable management team are essential factors in their evaluation.

Q. What are convertible notes, and how do they work in angel investments?

Answer: Convertible notes are a common form of early-stage startup financing. They are essentially loans that convert into equity in the future, typically during a future funding round. Angel investors provide capital to startups in the form of convertible notes, which have a predetermined conversion price and often come with a discount or cap. When the startup secures a subsequent round of funding, the convertible notes convert into equity at the agreed-upon terms.

Q. What industries or sectors are currently attracting the most interest from angel investors, and why?

Answer: The industries and sectors that attract the most interest from angel investors can vary over time. However, technology-related fields such as fintech, healthtech, and software-as-a-service (SaaS) have consistently been of interest due to their high growth potential. Additionally, sectors related to sustainability, clean energy, and social impact are gaining more attention as investors seek to support solutions to pressing global challenges.

Q. Are there specific geographic regions or startup ecosystems that are particularly favorable for angel investments?

Answer: Yes, certain geographic regions and startup ecosystems are known for their attractiveness to angel investors. Silicon Valley in California, for example, has a well-established ecosystem with a high concentration of angel investors due to its history of successful startups. However, other regions, such as New York City, Boston, and emerging tech hubs like Austin and Denver, also have thriving angel investment communities.

Q. How can startups balance the need for funding from angel investors with maintaining ownership and control of their company?

Answer: Startups can strike a balance by carefully negotiating investment terms with angel investors. They can consider alternative financing options, like convertible notes or revenue-based financing, that provide funding without immediately diluting ownership. Additionally, maintaining a clear vision, setting boundaries, and maintaining open communication with angel investors can help startups retain some level of control over their company’s direction.

Q. What are some common mistakes or misconceptions that startups have about angel investment?

Answer: Common mistakes and misconceptions include underestimating the time and effort required to secure angel investment, assuming that all angel investors are the same, and neglecting to conduct thorough due diligence on potential investors. Startups should also be cautious about giving away too much equity too early and not seeking legal or financial advice during the investment process.

Q. How has the landscape of angel investment evolved in response to changes in technology and global markets?

Answer: The landscape of angel investment has evolved significantly with advancements in technology and changes in global markets. Online platforms and crowdfunding have made it easier for startups to connect with angel investors. Additionally, the globalization of startup ecosystems has increased the diversity of startups and investors, leading to more cross-border investments and opportunities for collaboration. The rise of impact investing has also brought about a greater focus on social and environmental responsibility among angel investors.

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Angel Investors: The Key Details & 5 Best Investment Networks

Published: November 11, 2021

Struggling to find financing is one of the harshest realities of startup life — with several businesses essentially starting from scratch. According to a 2019 study from SCORE , 42% of entrepreneurs are bootstrapping, starting with less than $5,000 in cash reserves.

When startup founders hit a certain point — often after dipping more into their savings than they'd like or exhausting what family and friends are willing to chip in — they start to explore other courses. One of the more attractive yet challenging options is landing an angel investment.

Here, we'll go over what an angel investor is, review the best angel investor networks, see the pros and cons of working with angel investors, and go over some tips to help you maximize your chances of receiving this kind of funding. Let's jump in.

What is an angel investor?

An angel investor is a typically wealthy individual who provides capital to startups in exchange for equity. These kinds of investors tend to support early-stage startups — ones that aren't in a place to appeal to a wider base of investors quite yet.

Angel investors generally look for promising startups in their seed or Series A rounds of financing and offer those businesses injections of much-needed capital to help get them off the ground.

Let's take a closer look at what they do.

How does an angel investor work?

For most early-stage startups, angel investors represent the bridge between self-financing or sourcing funds from friends and family and receiving investments from established venture capital firms.

Angel investors typically have high net worths and extensive business experience that they can leverage to help the companies they fund. Once they've invested in a startup and received their appropriate equity , they usually assume an advisory role for that organization's leadership.

In most cases, they invest in industries they're familiar with — a trend that can make them excellent networking resources for startups. They're often well connected and can refer founders to other private investors as their businesses mature.

For a closer look at what angel investors do, check out this video from Investor Trading Academy

Best Angel Investor Networks

1. angellist.

Pricing: Free to Raise Money

AngelList bills itself as the world's largest startup community. The platform doubles as an angel investment resource and a network for job seekers. Its investment side — AngelList Venture — provides two funding options for founders: recurring transfers and roll-up vehicles.

Recurring transfers offer rapidly growing companies the means to offer employees and early investors liquidity on a regular, rolling basis. That said, this option is reserved for businesses with valuations of over $100 million with notable VC investors.

Roll-up vehicles, on the other hand, are more widely available for startups of most sizes. This method gives founders a single link that allows investors to commit and send funds online. From there, AngelList handles the administrative side of the process — including all filings, tax documents, and distribution management.

Best for Startups Looking for More Than Funding

AngelList offers resources for startups that extend well beyond funding. The platform can help connect startups with job seekers, handle incorporation, and assist with equity management — among other perks. If you're looking for a "one-stop-shop" solution that provides more readily accessible funding options than other networks, consider looking into AngelList.

2. Angel Investment Network

Pricing: Register for Pricing Information

The Angel Investment Network is a resource that can connect entrepreneurs with a pool of close to 300,00 active investors. It offers a straightforward, accessible template for founders to structure their pitches.

From there, entrepreneurs can publish those pitches for angel investors on the platform to browse. If your post catches investors' attention, they can reach out via the network's in-application messaging function — allowing you to either receive funding or expand your personal network.

Best for Startups Looking for an Accessible Platform

The platform offers four tiers of listing options ranging from free to $1,999 — with varying degrees of reach, visibility, and listing length. With a wide range of posting options that can suit startups with virtually any budget, Angel Investment Network is a solid choice for anyone pursuing angel investments.

3. Republic

Pricing: Apply for Pricing Information

Republic is a prominent investor-centric angel investment network. The platform is primarily tailored towards individuals interested in investing in thoroughly vetted, high-upside startups, real estate ventures, crypto plays, and video games.

It's essentially a sophisticated crowdfunding program that democratizes angel investing. Prospective investors can invest as little as $100 per startup at a time. Its accessible interface gives users immediate insight into the companies they're interested in funding — along with each business's valuation cap.

The program has a simple yet rigorous application process for entrepreneurs to list on the site. But once you're in, you're given tremendous visibility to a host of potential supporters — from seasoned VCs to small-time contributors — and the opportunity to raise up to $5 million per campaign.

Best for More Mature Startups, Prepared to Pass Rigorous Screening

Republic is an extremely exclusive platform for startups. It's not easy to pass its screening process and get listed on the site. So if you're only just starting to piece your business together, you're going to have a hard time landing on its front page — but if your company is a bit more well-established with demonstrated upside, Republic can be an invaluable resource.

Pricing: Packages Starting at $300 per Year

Gust is an investment community, boasting a network of over 800,000 founders and 85,000 investment professionals. The platform offers the means to connect with angel investors, but its functionality and merit aren't limited to that.

The program also helps you grow your startup by providing performance benchmarks, actionable feedback, and clear next steps for your company as it matures. Gust is tailored to help startups of every stage from seed funding to Series C.

It also has impressive resources for investors and accelerators. With low-priced packages available, it's an excellent resource for startups of virtually any size as they mature and establish themselves in their respective industries.

Best for Startups Looking for Comprehensive Guidance

For startup founders, Gust is less of a traditional angel investment network and more of a comprehensive assistance platform that happens to have an angel investment-oriented element. So if you're in the market for a program that will help you bolster the legal and financial elements of your business — all while providing access to investors — you might want to give Gust a closer look.

5. FundersClub

FundersClub is another exclusive, competitive service for startup founders. It only accepts around 2% of its applicants — but if you make it through the application process, you'll be in an excellent place to attract and connect with angel investors.

The network boasts an impressive list of alumni — including Instacart, Coinbase, Flexport, and GitLab. The platform also recently added a network search function where founders can search for and automatically request intros with potential investors.

Best for Relatively Mature Startups With Demonstrable Traction

FundersClub offers startups a unique combination of exclusivity, prestige, visibility, access, and ease of use — but that only comes with your ability to demonstrate considerable traction and legitimate potential. And as I mentioned, the vast majority of startups don't meet the platform's rigorous standards.

So if you want to work with this network, you'll need to show tangible progress, have a lucrative market you appeal to, and ensure that your people and product are more than sound. If you can't absolutely nail all of those elements, applying to FundersClub might not be worth your time yet.

Pros and Cons of Working With Angel Investors

Pro: it's relatively low risk..

Unlike loans, angel investments don't have to be paid back. If you land an angel investment, you're essentially staking your credibility and reputation on how far you can take your business — but you're not incurring much financial risk.

Con: You forfeit some control of your business.

Angel investors aren't fronting you capital for nothing. They typically assume some degree of ownership or equity in your startup in exchange for their investment.

So if you take an angel investment, you're expected to cede some control of your company — and the stake you offer your investors might be significant enough to have some major implications on your ability to run your company as you see fit.

Pro: Angel investors tend to be business-savvy.

Many angel investors were successful businesspeople in their own right — they're typically seasoned, sensible, and smart enough to have amassed enough money to put up capital for startups. And if you take their investments, you can leverage their knowledge and business acumen in the form of actionable advice and guidance. That can come in handy when you hit snags or deal with growing pains.

Con: You ultimately have to kick up some of your profits.

Obvious as this might sound, it's still worth pointing out — an angel investment isn't free funding. If your business goes the distance and starts to turn a profit, you're going to have to kick some of that money up to your angel investors, based on how much equity you gave them for their initial investment.

Pro: Angel investors often have a personal stake in your success.

Angel investments are financial transactions that often have a personal edge to them. Your investors want to see you succeed — for both your sake and theirs. That's why many are willing to be a valuable resource to help put you in touch with the right people and navigate the murky waters of startup life.

Con: Angel investors often have a personal stake in your success.

Though an angel investor's personal investment in your business is often beneficial, it can also be smothering. Some investors take an approach that's a bit more hands-on than certain founders would like. You want your angel investor to offer you an appropriate balance of trust and guidance — it can be frustrating if they overdo the latter.

How to Get an Angel Investment

1. make sure you're all the way ready..

Angel investors generally aren't going to dole out cash if you pitch a neat idea without some kind of tangible backing. They're trusting you with a potentially sizable investment — so, naturally, you need to prove that you're trustworthy .

Your product or service needs to be either complete or near completion — you need your tech to be sound with tremendous upside. In most cases, you'll also need to have existing customers or a significant base that you can convincingly demonstrate will buy from you.

On top of that, you have to have a thoughtful, effective, executable business plan in place — along with realistic and compelling forecasts that can highlight exceptional growth potential.

If you try to land an angel investment without these key elements prepared — among others — you're going to face an uphill battle. Any angel investment takes some degree of faith, but savvy investors don't go in blind.

They want to minimize the risk behind their investments. Being thoroughly prepared — with a product or service that's ready for release and a plan to sell it effectively — can put their minds at ease and make them inclined to put up some serious capital for your business.

2. Network like your life depends on it.

Connections with angel investors don't come out of the sky. You can't bank on a potential investor happening upon your early-stage startup on their own and passing along a six-figure investment out of the kindness of their heart. As lovely as that prospect might sound, it's a starry-eyed daydream — not a legitimate plan for sourcing capital.

In many cases, you'll link up with an angel investor via referral — professional connections are often the most effective road to angel investments. So if you want to maximize your chances of finding interested funders, you need to network.

Consider attending local angel investor events — they pop up around the country periodically and provide excellent opportunities to connect with potential funders.

You should also reach out to other business owners. They might know angels who could be interested in floating you some cash, or they might even be interested in investing themselves.

Industry-specific organizations can also help you gain traction when it comes to linking up with angel investors. Joining and remaining active in those kinds of groups can put you in touch with like-minded entrepreneurs who can connect you with funders interested in your space.

3. Thoroughly research who you're trying to connect with.

You don't want to go into a meeting with an angel investor blind. These kinds of connections can be hard to come by, so you want to put yourself in a position to make the most of them. That starts with thorough research on your potential funder, their investment history, and their professional credentials.

Angel investors (or groups of angel investors) tend to have their own processes for landing on the startups they want to fund. So take the time to see who they've funded previously, their areas of expertise, and the kind of capital they usually put up — if possible.

An effective presentation is thoughtfully tailored. It speaks to the specific interests of the people on the other side of it. If you want to maximize your chances of landing an angel investment, you need to have a firm grasp of what your investors want to hear.

4. Have a thoughtful, effective, concise elevator pitch ready.

Connecting with angel investors isn't always some carefully calculated process you conduct online. In some cases, you might meet one in person at a networking event or some other kind of professional function.

In those cases, you need to have a well-crafted elevator pitch that reconciles being informative with being concise: a quick, to-the-point speech that conveys your startup's essence.

Yours should be compelling and attention-grabbing — covering who you are, what your company does, and your unique value proposition — and end with some sort of call-to-action.

As I said, finding angel investors isn't always some sort of long-term, back-and-forth exchange where you have the time to get your thoughts in line. It can be pretty spur-of-the-moment — so be prepared to get your message across within a short window.

5. Maintain active lines of communication with any investors you connect with.

Once you've connected with a potential angel investor, you'll need to maintain accessible, active lines of communication with them. The chance to present for an angel investment typically comes after some back-and-forth.

Very few — if any — angel investors will front you cash after a single conversation. They're probably going to do their due diligence, taking the time to feel you out and better understand you and your business.

Actively communicating with them helps facilitate that process, keeps you top-of-mind, and allows you to determine whether landing an investment from them is viable. Bear in mind, "active" doesn't mean "pushy." If you constantly badger them with messages and voicemails, you might undermine their positive perception of you.

You want to show that you're persistent — that you'll dedicate yourself to making the most of their investment — but at the same time, you don't want to come off as desperate or waste too much of their time and energy. It's a delicate balance, but you need to strike it if you want to prove your worth without frustrating your potential investors.

6. Make sure you want to work with them.

That "feeling out" process with investors I mentioned goes both ways. You need to communicate with potential investors to make sure you're on the same page — to know for sure that you have matching priorities and compatible work styles.

If you connect with an investor who is going to be too aggressive in their involvement with your business or has radically different goals for your company, you might want to explore other options.

Angel investments are often hard to come by, so unless your business is poised to take off — with traction, a lucrative market, and the right people behind it — you might want to wait before allocating too much time to the process of landing one. But if you think you're there, connecting with an angel investor can provide a much-needed influx of capital that can help set your big plans in motion.

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Home > Funding > Angel Investor Funding for Startups

Angel Investor Funding for Startups

Business angel investor funding refers to equity investment from individuals who invest directly in high risk startup businesses with a view to earning higher rates of return than traditional equity investment offers. The angel investment is usually needed as seed capital to bridge the gap between small investments from friends and family, and the much larger funding provided by venture capital.

What does an Angel Investor Look for?

Business angel investors accept a high risk in order to earn high annual rates of return. It is not unusual for a business angel to require a 20-40% compound annual growth rates on their investment, the higher the risk the higher the required return will be. As a result of seeking a large percentage of the equity of the business angel investment is seen as an expensive form of capital.

Investor Equity Percentage Calculation

It is important when pitching to an angel investor that the business plan and financial projections demonstrate how the investor will get their required return and not concentrate solely on the business and it’s products.

An angel investor will seek to acquire a percentage ownership of the business which will provide them with their required annual rate of return.

Suppose for example, an angel investor is seeking an annual return of 25% on their investment of 150,000 in a business they forecast to be worth 976,500 in 3 years time.

What is the Angel’s Investment Worth After 3 Years?

It should be noted that the same answer can be found using the future value formula or the Excel FV function as shown below.

In order to make a return of 25% the investor hopes that their investment of 150,000 will be worth 292,969 after 3 years.

Calculation of the Angel Investor Equity Percentage

If the investor and the entrepreneur have agreed that based on the financial projections the value of the business at the end of 3 years is expected to be 976,500, we can calculate the percentage equity required by the investor to achieve their annual rate of return as follows.

In summary, the investor will seek 30% of the business for 150,000 in the hope that at the end of three years the business will achieve its valuation of 976,500. At this valuation the investor’s share will be worth 292,969 giving the required 25% annual return.

What is the Value of the Business?

The example above assumes that the angel investor and the entrepreneur have agreed on a fixed valuation of 976,500 on which to base the calculation of the investor’s initial equity percentage.

In reality, for the purposes of this calculation, the investor will try to seek a lower valuation in order to increase the equity percentage, and the entrepreneur will seek a higher valuation to reduce the equity percentage.

If for example, the entrepreneur placed a valuation of 1,953,000 on the business instead of the lower valuation of 976,500 required by the investor, then the equity percentage calculation would show that the investor should receive only 15% of the equity as demonstrated below.

Providing the valuation at the end of 3 years is 1,953,000, the investors share will be worth 292,969 and the investor will again achieve their 25% annual return.

In practice the angel investor and the entrepreneur must negotiate a valuation which they are both comfortable with.

Agreeing the Equity Calculation Mechanism

In the above example, the investor sought to value the business at 976,500 giving them 30% of the equity, whereas the entrepreneur wanted a valuation of 1,953,000 giving the investor 15% of the equity.

There are numerous ways in which the investor and entrepreneur can come to an agreement.

For example, the investor and entrepreneur might seek to achieve the following.

• To vary the equity percentage over outcomes between the investor’s valuation of 976,500 and the entrepreneur’s valuation of 1,953,000 in order to provide a constant annual return for the investor of 25%.
• To limit the downside risk of the investor by fixing the equity percentage at 30% for outcomes below the investors valuation of 976,500.
• To keep the entrepreneur motivated by fixing the equity percentage at 15% for outcomes above the entrepreneurs valuation of 1,953,000.

The impact of each of these points on the equity percentage is shown below.

Outcomes Between the Investor’s and the Entrepreneur’s Valuations

For outcomes between the investor’s valuation of 976,500 and entrepreneur’s valuation of 1,953,000, the equity percentage is adjusted to fix the investors annual return at the required 25%.

As we have seen above, to achieve the return of 25% the investor requires the value of their investment to be 292,969 at the end of 3 years. At the lower valuation (976,500) this means the equity percentage needs to be 30%, and at the higher valuation (1,953,000) the equity percentage needs to be 15%.

For valuations in between the equity percentage will lie between these two extremes. For example, if the outcome is 1,465,000, to achieve their required return the investor percentage is calculated as follows.

Outcome Lower than the Investor’s Valuation

At the investors valuation of 976,500 the required equity percentage was 30%. Under the planned agreement, the investor seeks to limit the chances of making a loss on the investment by retaining the higher equity percentage of 30% for outcomes less that 976,500.

To understand why the higher equity percentage reduces the chance of making a loss lets take a look at an example.

In order not to make a loss, the investor must receive back at least the 150,000 they invested. If the investor holds 30% of the equity the minimum valuation before the investment makes a loss is calculated as follows.

The valuation would need to fall below 500,000 before the investor makes a loss.

Now consider what happens if the investor equity percentage had been set lower at 15%, in this case the minimum valuation would have been calculated as follows.

At the 15% equity level the investor would start to make a loss if the valuation fell below 1,000,000 instead of the 500,000 calculated at 30%.

Outcome Higher than the Entrepreneur’s Valuation

At the entrepreneur’s valuation of 1,953,000 the required equity percentage was 15%. This time the agreement seeks to motivate the entrepreneur by limiting the investors percentage to 15% allowing the entrepreneur to retain the remaining 85% of the equity for higher outcomes

For example, if the outcome is 3,048,500, the investor’s equity percentage is held at 15% and their return is calculated as follows.

It should be noted that although the investor’s equity is limited to 15%, they have still made an annual return of 45%, way above the required return of 25%.

Angel Investor vs Venture Capital

Angel investors differ from venture capital providers in that they normally act alone investing their own money, whereas venture capital providers operate through a venture capital fund, representing a group of investors who are seeking a return on their investment in the fund. Due to the high administration costs of managing a fund, and the need to reduce the risk involved, venture capital tends to be for much larger amounts and at a later stage in the development of the business.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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An angel investor is an affluent individual who provides critical capital and funding to startups during their nascent stages. Distinct from venture capitalists and private equity firms, these investors not only offer financial support in the form of money but also contribute mentorship and strategic networking opportunities.

Key Takeaways

• An angel investor provides essential capital and resources in the early stages of a startup, often filling a crucial gap before venture capitalists step in.
• Beyond money, an angel investor contributes valuable mentorship, industry insights, and networking opportunities to a new company.
• A well-crafted business plan is vital for startups to attract angel investors, as it demonstrates the potential for growth and return on investment.
• Angel investing plays a significant role in the entrepreneurial ecosystem, offering not just funding but also strategic guidance to startups.
• Understanding the dynamics of angel investing, including the differences between an angel investor and other types of investors, is crucial for startups seeking early-stage funding.

Angel investors are pivotal for entrepreneurs in transitioning from initial concept to a viable business, often bridging the crucial early funding gap.

Historically, angel investing began as informal investing by wealthy individuals in promising startups. Over time, this evolved into a more structured approach to early-stage financing. Today, an angel investor remains integral to the startup ecosystem, often stepping in where traditional financing methods are inaccessible. As the business landscape continues to evolve, the role of angel investors in providing both capital and invaluable guidance continues to be of paramount importance, underscoring their enduring relevance in nurturing new business ventures.

Pre-Planning Process

An angel investors, pivotal in the startup ecosystem, often does not directly engage in a founder’s pre-planning process. This stage, essential for foundational development, precedes external funding and is where the business’s core ideas and strategies are refined. Despite their indirect role, understanding this phase is crucial for angel investors, as it reveals the new company’s potential and strategic direction.

The pre-planning phase is where startups identify their target market, develop their business model, and analyze competitors. For an angel investor, these insights are crucial. They demonstrate the startup’s market understanding, the viability of its business model, and the strength of its value proposition. While an angel investor provides capital, their decision to invest hinges on the quality of the founder’s pre-planning.

Angel investors look for signs of a robust pre-planning process, including a well-defined business model and realistic market assessments. This knowledge is key in evaluating a startup’s readiness and potential success, influencing their investment decisions.

The pre-planning process offers angel investors a lens to assess new company viability and guides them in their capitalallocation, underscoring their critical role in the entrepreneurial landscape.

Business Plan Document Development

A well-crafted business plan is a linchpin for a startup seeking to attract an angel investor. It’s not just a document; it’s a testament to the founder’s vision, strategy, and potential to scale. For angel investors, who often bridge the gap between self-funding and venture capital, the business plan serves as a critical tool in evaluating the feasibility and future profitability of their investing endeavors.

An angel investors primarily looks for clarity and thoroughness in a new company’s business plan. They seek detailed insight into the new company’s value proposition, market analysis, and competitive landscape. A comprehensive business plan should also clearly outline how the startup intends to use the angel investor’s capital. It should detail the expected milestones and how each tranche of funding will drive growth and development. This transparency in financial planning and allocation of resources assures investors that their money is being put to optimal use.

Furthermore, investors examine the business plan for realistic financial projections and a well-thought-out exit strategy. This includes understanding the new company’s revenue model, cost structure, and the break-even point. They also assess the management team’s competence, as their ability to execute the plan is as crucial as the plan itself.

In essence, the business plan is a pivotal factor for angel investors. It not only showcases a new company’s potential for success but also reflects its readiness to effectively manage and grow with the invested capital.

Startup Entrepreneurs

The journey of a startup entrepreneur seeking angel investment is often illuminated by inspiring success stories. These narratives, where startups turn into market leaders with the backing of an angel investor, sets a compelling precedent. As an entrepreneur, it’s essential to understand what to expect when seeking angel investment. Unlike venture capitalistsor private equity firms, angel investors, often termed as business angels or informal investors, typically engage during the early stages, providing not just capital but also valuable mentorship and network access.

When approaching an angel investor, startups should focus on crafting a compelling pitch. This pitch should clearly articulate the investment opportunity, how the startup plans to use the funding, and its potential for growth. It’s crucial for the founder to convey their passion, the uniqueness of their business, and how it stands out in the market. The ability to effectively communicate the startup’s vision and strategy is key in attracting angel investment.

Real-life case studies of startups that successfully secured angel investment can offer practical insights and relatable experiences. These stories often highlight the importance of aligning the new company’s goals with the interests of the angel investor and the significance of transparent communication.

In conclusion, best practices for engaging with angel investors include thorough preparation, clear articulation of the investment opportunity, and being open to investment advice. Navigating this path requires understanding the nuances of angel investing and effectively leveraging the unique support that these early-stage investors provide.

Business Students

Angel investing holds a unique allure in the entrepreneurial landscape, particularly for business students exploring the intricacies of early-stage financing. The educational journey into understanding angel investment encompasses grasping the nuances of how angel investors, distinct from venture capitalists or institutional investors, play a pivotal role in a new company’s growth. Unlike traditional sources of capital, angel investors often bring a combination of money, mentorship, and networking opportunities to the table.

The theoretical aspects of angel investing cover a range of topics from the evaluation of investment opportunities to understanding the securities act and its implications for startups and investors. Business students should delve into the concept of equity financing, where investors like angel investors and seed investors acquire a stake in the new companyin exchange for their funding. This study also involves exploring venture research, analyzing deal flow, and understanding the roles of various stakeholders, including high net worth individuals.

Real-life applications provide a relatable context, illustrating how theoretical concepts are applied in the real world. Analyzing case studies and current trends offers insights into the decision-making processes of investors and entrepreneurs.

In conclusion, academic study plays a crucial role in comprehending angel investing. It equips future entrepreneurs and financial professionals with the knowledge to navigate the complex dynamics between startups, investors, and market forces effectively.

The landscape of small and medium-sized businesses (SMBs) is often transformed by angel investments. These investments, known as angel funding, can propel SMBs to new heights, offering not just capital but also strategic expertise. Unlike venture capitalists or venture capital firms, angel investors, including private investors and wealthy individuals, often engage with businesses in their nascent stages. For an entrepreneur or a startup founder, understanding the potential and limitations of angel investing, which could include an angel investment network, is key to harnessing its benefits.

SMBs seeking angel investment should be cognizant of specific criteria and processes. Angel investors typically look for businesses with a strong value proposition and potential for high returns. Unlike non-accredited investors, investors often bring significant money and experience to the table. It’s crucial for SMBs to effectively communicate their vision, market position, and how the funding will be utilized to scale the business.

SMBs considering angel investment should strategically weigh their options. This includes understanding the nuances of equity exchange, aligning with the right investors, and being prepared to leverage the expertise and networks that investors can provide. The right approach can open doors to significant growth and development opportunities for SMBs.

Frequently Asked Questions

• What differentiates angel investors from venture capitalists?

Angel investors and venture capitalists have distinct roles in the startup ecosystem. The scale of investment is a primary differentiator; angel investors typically provide smaller amounts of capital compared to venture capitalists. They usually get involved at an earlier stage, often when the startup is in the ideation or development phase, offering seed funding. In contrast, venture capitalists generally engage at later stages when the startup has established operations and a clearer path to profitability. Additionally, investors may offer more flexible terms and take a personal interest in the entrepreneur’s success, whereas venture capitalists focus more on the financial returns and business scalability.

• How do angel investors typically contribute beyond capital?

Beyond providing capital, angel investors often bring invaluable non-monetary contributions to a new company. This includes mentorship, where they share their expertise and experience, guiding the founder through the complexities of growing a business. They also offer network access, connecting entrepreneurs with potential customers, partners, and even future investors. Strategic advice from investors can be crucial, as they may have industry insights and operational knowledge that can help steer the new company towards success.

• What are common terms and conditions set by angel investors?

The terms and conditions set by angel investors often revolve around equity exchange and the future financial trajectory of the startup. Common agreements include equity stakes in return for funding, with expectations clearly outlined regarding the new company’s growth and potential exit strategies.Investors may also seek advisory roles or board positions. The use of an angel investor tax credit is another aspect, especially in jurisdictions that offer tax incentives for investing in startups. It’s advisable for entrepreneurs to consult with a financial advisor or an accredited investor to understand these terms thoroughly and ensure alignment with the new company’s goals and capabilities.

Related Terms

Also see: Venture Capital (VC) , Seed Round , Equity Financing , Accredited Investor , Early-Stage Startup , Startup Assets

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Home > Finance > Loans

What Is an Angel Investor?: Who They Are and What They Can Do for Your Business

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Whether you’re looking for seed investors to get your business off the ground or you need to raise money to expand your business (and your profit), angel investors are worth looking into. But how do they work? And how are you supposed to get one?

That’s what we’re here to explain. So if you want your business to be touched by an angel investor, read on to learn how you can make that happen.

What you should know about angel investors

Angel investors 101, how does angel financing work.

• The pros and cons of angel investing

How to get an angel investor

Other funding options.

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Angel investors are individuals who invest in startups and young businesses by providing funding in exchange for equity (ownership shares) in the business. Technically speaking, angel investors must be accredited investors, but increasingly, you’ll see business owners’ investing family and friends described as angel investors—even if they don’t meet the wealth requirements.

Not all angel investors work individually, though. There are plenty of investor groups, or angel networks, out there formed by investors who pool their resources to invest in companies.

Some angel investors and angel networks have specific funding interests. For example, Hivers and Strivers is an angel group that invests in the business ventures of US military academy graduates. Likewise, you might find investor groups that fund businesses with founders from minority groups.

As we said, angel investors make a startup investment in exchange for equity. So how much money can you expect to get? Well, the numbers can range from tens of thousands to (rarely) millions. But according to the U.S. Small Business Administration (SBA), the average investment from an angel investor is $330,000—not a bad chunk of change. 2

Exciting as that sounds, we want to be clear that angel investors are not just throwing money at your business and hoping you do well. Angel investing is a type of equity financing. So while getting money is great, don’t forget that you’re giving up business equity to get it. How much equity will depend on your specific investment angel and the deal you make with them, but we’ve seen anywhere between 10% and 40%.

What the angel investor does with that equity will also depend on the individual, but it’s pretty common for angel investors to get heavily involved with the businesses they fund.

You’ll see lots of active angel investors who see their investment as an opportunity to provide not just money but also advice, mentorship, and networking opportunities. That means you can benefit from the entrepreneurial experience of a seasoned investor, but it also means that you’re giving up at least a little control.

So is the trade-off worth it?

How does an angel investor get paid?

Well, there’s no guarantee that an angel investor will get paid. In fact, a lot of angel investors claim that angels usually lose money on their investments because they pick unsuccessful startups.

But let’s assume your business takes off and everything goes well (yay!). In that case, how does your angel investor get paid? It all goes back to that equity they take.

Angel investors are anticipating what is often referred to as an equity event. In many cases, the startup ends up getting sold, and the angel’s equity means they get a share of the profits. Other startups have an IPO, or initial public offering. In that case, the company starts selling shares on the stock market. Sometimes, the angel gets paid off as part of the IPO. Otherwise, the IPO gives the angel investor a chance to cash out their shares. In some instances, angels simply get dividends that the startup pays to its owners.

All of which is very nice for the angel investor. But is the trade-off in equity worth it for you?

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The pros and cons of angel investors

Honestly, there’s a lot to like about angel investors.

Like the fact that they provide financing to startups that haven’t been around long. Getting startup business loans can be difficult since banks don’t want to risk lending to brand-new businesses. Angel investors are more likely to take a risk on young, up-and-coming companies (and young entrepreneurs).

It’s the same with cash flow. If you want to get the best small-business loans , your business will need to have a history of profit and healthy cash flow. But angel investors care more about where your business is going—they may not care if you haven’t had $250,000 in profit for the past two years.

Aside from providing financing to startups that otherwise can’t get money, angel investors provide those mentorship and networking opportunities we talked about above.

And of course, one of the best benefits of getting money from angel investors is that you don’t have to pay anything back (at least, in the form of a periodic payment). The money is yours to use for the business.

Which brings us to the big con: losing equity in your business. Again, angel investors can request anywhere from 10% to 40% in your business. With any luck, that will never be a problem because you and your angel investor will get along so well and agree on the direction the business is going. But there is a possibility that your angel investor will use their equity to push the business in a direction you don’t like.

Remember, your angel investor becomes a minority shareholder in the success of your business. That means you should look for an angel who doesn’t just have money, but who also has the expertise you need to help your business grow.

Now you know the pros and cons of angel financing. Still interested? Then let’s talk about how to get in on this source of funding.

First, make sure your business is a good candidate for angel investing. Angels tend to look for a high return on investment, so if you want to open just one boutique clothing shop and never expand, don’t be surprised when investors pass on your pitch. But if you’ve got a business that will explode—if you can just get the right funding—then you’re exactly what an angel investor wants.

Put another way, angels (and venture capitalists) look for businesses that are ready to scale with the help of some capital. More specifically, they want to invest in businesses that will eventually have an IPO (initial public offering) or be acquired—giving the angel a good return on their investment.

So come with a good pitch. As part of this, make sure to create a business plan that shows business projections with how you plan to achieve your goals. Likewise, you should include information about the market opportunity for your business—what niche are you filling, and who will buy your services or products? Go ahead: prove you’ve got the entrepreneurship to succeed.

Once you’ve got a good pitch ready, you can find angel investors. There are online directories, like AngelList , but don’t forget to look locally too. Your local Chamber of Commerce may have great leads on investors looking to invest money in local businesses. Some universities have strong connections with angel investors. And if you have a flair for the dramatic, you can even try to get on Shark Tank . There are plenty of ways to find angel investors to pitch to.

However you find your investor, make sure they’re a good fit. While it’s tempting to accept funding from any investor who will give you money, you want to be sure that their vision of your partnership and the company aligns with your own. Otherwise, giving up that equity will be a problem.

But if they like your pitch and you like their style, then congrats! You’ve found yourself an angel investor.

If angel investing isn’t right for your business, you have plenty of other small-business funding options .

For example, if you want another type of funding that doesn’t require you to repay a loan, you can look into grants . Grants will give you free money for your business, making them a super appealing option for most businesses. The downside? Grants require lengthy applications, and they’re highly competitive. Plus, the funds may be earmarked for specific uses. Even so, grants are an option for free cash.

Then there’s crowdfunding . There are plenty of sites that offer crowdfunding for startups (though Kickstarter is our favorite). You pitch your idea to the world, and if people like it, they’ll help fund your project. Usually people fund in exchange for some kind of reward, but equity crowdfunding is common too. If your product clicks with people, it can be a boon for your business. But with so many companies competing for people’s money and attention, you’ll have to invest plenty of time into making your pitch.

And of course, there are loans . Unlike angel investors, grants, and crowdfunding, loans require you to actually repay the money you get, which makes it a less appealing option. But loans are a tried-and-true way of funding and expanding businesses, and you have tons of loan options. So while it may not be your first choice, there are plenty of reasons to get a startup business loan . For the record, we’ve found Lendio to be the best source of loans for most businesses.

Enter your loan needs and qualifications to get matched with a list of lenders best suited to you. Then, sort by the financing factor that you find most important. ( Note:  not all lenders allow personal loans for business use.)

The takeaway

A wealthy angel investor can be a great way of securing your business’s financial future—if you have what it takes to find them, pitch to them, and secure their investment. Sure, you’ll have to give up some company equity, but you’ll receive money and mentorship in return.

Not a bad trade-off, we think.

Not sure angels are right for you? Check out another nontraditional funding option with our guide to the best crowdfunding sites for startups .

FAQs about angel investors

Angel investors are paid when the company is sold or goes public on the stock exchange (through an IPO or SPAC). Angel investors provide funding to a company in exchange for an equity (or ownership) stake, so when the company is sold or valued on the stock market, the equity stake can be sold based on the company’s valuation. For example, Facebook had a valuation of $90 billion when it was first traded on the stock market. So, if an angel investor had provided funding for a 10% equity stake in the company, they could trade in that stake for $9 billion based on the company’s valuation.

An angel investor is an investor or a group of investors who provide funding to startups and young businesses in exchange for an equity stake in the company. They provide money upfront to businesses that want to scale in exchange for money in the future (an equity stake) when the company goes public on the stock market or is sold.

What percentage of equity do angel investors want?

The exact amount of equity an angel investor wants will vary from investor to investor and startup to startup, but most estimates we’ve seen are in the 10% to 40% range.

How is an angel investor different from a venture capitalist?

As we mentioned, angel investors usually invest in younger startups than venture capitalists do. They also invest less money, and they usually expect smaller returns than a VC firm would.

For a more detailed breakdown, check out our comparison of angel investors vs. venture capitalists .

Who are some examples of angel investors?

You’ve probably seen angel investors like Mark Cuban and Lori Greiner on Shark Tank who have invested in BeatBox Beverages and Scrub Daddy. Naval Ravikant is another prominent angel investor who invested early in Uber, Poshmark, Postmates, Clubhouse, and Twitter. He's also the cofounder of the startup community AngelList. Joanne Wilson is another angel investor who is well known for investing in female-founded companies. Some of her investments are Foo52, DailyWorth, Rick’s Picks, and Hot Bread Kitchen.

Can anyone be an angel investor?

Technically, no, not everyone can be an angel investor. An angel investor has to be an accredited investor with the U.S. Securities and Exchange Commission, which has income and net worth requirements. So most “legit” angel investors are very wealthy individuals looking for investment opportunities.

That being said, lots of people get described as angel investors without meeting the technical definition. Non-accredited investors, like friends and family who decide to invest in your startup, might get called angel investors—if only because investing in a risky new startup is a pretty angelic thing to do.

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• Investor.gov, “ Updated Investor Bulletin: Accredited Investors .” Accessed December 6, 2022.
• U.S. Small Business Administration, “ Small Business Finance Frequently Asked Questions .” Accessed December 6, 2022.
• Angel Capital Association, “ FAQs for Angels & Entrepreneurs .” Accessed December 6, 2022.

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How to Structure Angel Investor Agreements for Your Startup

By Fernando Berrocal

Angel investors are wealthy, private investors who specifically fund startups–in return for equity. Angels solely utilize their net worth when investing, which strikes a contrast to venture capitalists (VCs), who provide capital through an investment fund. Angel investors tend to  also be more flexible with entrepreneurs, and are willing to make smaller financial commitments over a longer time.  Clearly, finding such an investor is a huge advantage for startups; however, structuring the right agreement with angel investors is crucial to the overall success of the partnership.  

To attract potential investors in the first place, entrepreneurs must learn how to structure angel investment arrangements. As a startup founder,  you must familiarize with the fundamentals of due diligence , have confidence in negotiating conditions, and learn how to complete deals. Angel investment agreements should be structured in a way that benefits both sides of the table.  With the appropriate, well-thought-out agreement in place, both parties will profit. This stage of a startup’s journey - the first deal with an angel investor -  is crucial since all the conditions that you accept here will eventually apply for the duration of the angel investment agreement.

How to Structure an Angel Investment Deal

If you have decided to fund your startup through an angel investor, crafting the proper agreement with this individual is critical to the future of your business.  The basic methodology can be broken down into six principles:

• Select the most beneficial type of angel investment for your business.  

Be aware that there are primarily two kinds of seed-stage angel investments in this situation. You choose how much stock each investor receives in exchange for their investment. How you decide how much equity to invest is the difference. The main types of angel investments are:

• Equity Share : An agreement to an ownership stake in your business.
• Convertible Note : A convertible note entails that you and your partner will consent to an early valuation of your property based on a few factors.

• Consult a lawyer about the details of your agreement.

At this stage, entrepreneurs become so enthusiastic that they overlook doing their paperwork correctly. Before agreeing to any contract with an angel investor, speak with a specialized lawyer to better understand the terms and structure of the deal. Make sure to provide your attorney with all relevant materials regarding the potential agreement.

• Negotiate equity. 

An investor will exchange his funds for an equity part in your business. Depending on the value that both you and the angel investor agree on, the investor will receive a certain amount of equity. For example, if the investor invested $175,000 in cash and your business was worth a million dollars, they would earn 17.5 percent of the startup.  From this point, things may get extremely difficult to get into account. 

You can issue a variety of stock, such as fast-paying or voting-rights-equipped shares.  The majority of business transactions will be structured as an equity stake for cash.  Remember, speaking with a specialized lawyer during these tense discussions can be very beneficial for both parties. The implications of these clauses can be complicated to comprehend for the decision-makers on both sides.

• Purchase convertible loans with cash or equity.

Entrepreneurs and investors may not always agree on how much a business is worth at present. When situations like this arise, businesses could elect to issue convertible bonds. These bonds provide both parties the option to decide how much the business is worth in the foreseeable future. This typically occurs when additional outside funding is involved. A debt to a business known as a convertible note matures when an investor contributes $150,000.  Imagine it takes a year to eventually mature. Over that period, interest will probably accumulate. The investor has two choices at maturity: one is to request cash payback; this is similar to an unsecured loan . The other is to turn the funds into equity. These are based on the value of time.

Convertible notes have become more popular among business owners and angel investors over time. It enables both parties to cooperate to maximize their investment. The investment will become a modest equity stake if the business does extraordinarily well and raises professional capital rounds at a high valuation within a year. The chance for investors to profit from this transaction remains open. It indicates that it has worth at the very least. The market worth of the business may be less than what the investor received when they made their investment if the organization is bankrupt. For the same amount of money invested, they would receive greater equity.  This does not necessarily represent a good offer, since it lowers the firm's worth.

• Produce a term sheet.

All terms and conditions of investments are described in documents known as term sheets . Therefore, you will either give or receive a term sheet from the investor once you have decided on the size and form of your business investment. Remember that a term sheet is required for every pitch you make. Although it doesn't necessarily imply that you have money in a bank account, this does show that the investor is interested in making a transaction.

• Remember: Once a deal is closed, it is not finalized.

A term sheet does not indicate that the closing legal paperwork is completed.  Even if everything is done correctly, the entire process can take up to 2 or 3 months.  In some instances, it can take even longer than the typical 90 business days. If it takes more than 120 days, it can be a failure. So, keep your guard up when you see a term sheet. It's simply an expression of genuine curiosity. Once you have the check in your bank, you can celebrate.

Ready to bring your startup to the next level? Apply to MassLight’s next batch . MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page .

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