What is an Angel Investor?
An angel investor provides the early seed money for a startup often in exchange for equity, convertible debt or royalties in the company. It can take different forms.
- The angel investor may be a serial investor who puts money in multiple projects or they could be a part of the person’s circle of friends and family.
- Their participation may be via a one-off cash injection or an ongoing multi-phase investment to launch and grow a product in the market.
- The investor may be deeply involved or hands-off.
The process of angel investing usually takes the following form.
- The investor connects with startups through referrals, conventions, seminars, word of mouth or online forums.
- If there’s shared interest, the investor conducts due diligence through interviews, document review and industry analysis.
- The parties enter a verbal agreement that is formalized through a contract detailing the terms. Once this is finalized, the angel investor releases the funds.
An angel investor is not a lender. They are taking a risk by putting their money behind an idea and reaping a reward only if the idea does take off. For this reason, angel investors are a softer source of funding for founders that want to avoid the restrictive terms of business loans and venture capital. On the flip side, the entrepreneur has to cede a share of their company and, often, a seat on the startup’s board.
Angel investing is a risky activity. To hedge their risks, angel investors usually dedicate no more than 10 percent of their portfolio to it. Unlike venture capitalists, angel investors invest their own money as opposed to pooling cash from multiple investors. Most angel investors have a high net worth and are looking for high return investment opportunities away from more traditional asset classes.
Angel investors in the US usually have accredited investor status, a designation overseen by the Securities and Exchange Commission (SEC).