Posted on April 2, 2022.

Angel investors are individuals who offer promising startup companies funding in exchange for a piece of the business, usually in the form of equity or royalties. While figures vary on an annual basis, as recently as 2017 angel investors put approximately $25 billion into 70,000 companies.

Angel investors may or may not be accredited investors, a classification given only to investors with very high incomes or net worths. With the passage of 2012’s Jumpstart Our Business Startups Act, the criteria for startup investors was expanded to include more everyday retail investors, including crowdfunding campaigns.

Getting to Know Angel Investors

Angel investors often come from the business world—but that’s not their only point of origin. Angel investors are commonly found in the following professions:

• Business professionals, like lawyers, doctors, accountants and financial advisors, among other professions.
• C-level company executives, who have risen through the ranks and know what it takes to run a successful business.
• Successful small business owners and entrepreneurs who have already launched successful companies and know how to recognize startups that have a bright and profitable future.
• Investors who make financing small businesses a professional pastime.
• Crowdfunding platforms that raise pools of money in groups, with each person investing a small amount in exchange for a small share of any eventual profits, if the company proves successful.

How Angel Investing Works

Angel investors prefer to get involved in the early stage of a company, at the “seed” or “angel” funding phase. That could mean the angel invests when the company exists only as an idea, or it could come when a business is already up and running.

Sometimes angel investors arrive on the scene after the initial round of funding, which normally comes from the founders themselves, friends and family of the founders or from bank financing. Typically, initial business funding isn’t substantial—it’s common for founders to roll out their product or service with $10,000 or so in initial funding.

Angel investors come in after the original funding is in place but typically before a company requires a more sizable investment from a venture capital company. Their investment is needed to grow a company at a critical (and usually early) stage of development, after the initial funding threatens to run out and before venture capital groups show interest in partnering with a promising business.

Here’s how the actual investment process rolls out:

• Angel investors connect with young, developing companies through word of mouth, through business and industry seminars or conventions, through referrals from professional investment organizations, from online business forums or via local events like chamber of commerce meetings.
• If there’s mutual interest, the angel investor will conduct due diligence on the young company by talking to the founders, reviewing business investment documents and gauging the industry the company is targeting.
• Once a verbal agreement between an angel is in place, a term sheet or contract is drawn up, with agreements on the investment terms, payouts or equity percentages, investor rights and protections, governance and control parameters and an eventual exit strategy for the angel investor.
• Once the contract is finalized an actual legal agreement is created and signed, the deal is officially closed and the investment funds are released for the company’s use.
• While contribution amounts vary, funding levels can be as low as $5,000 and as high as $150,000. Some angel investors group together as a syndicate and can provide funding up to $1 million for select companies.
• Angel investors don’t usually acquire more than a 25% stake in a company. Veteran angel funders know that the company founders need to hold the highest stake in their own companies as they then also have the highest incentive to make their companies successful.

Angel Investors vs Venture Capitalists

While angel investors and venture capital (VC) both fund companies in exchange for a piece of the action, there are significant differences between the two entities. Both tend to invest in startups, but typically they get involved at different stages in a startup’s lifecycle.

“An angel investor is more likely to provide capital for an idea whereas the majority of VCs would like a proof of concept in hand,” says Courtney Lawless, a venture capitalist at Philadelphia-based MoxeHub.

Another difference is the source of funds. Angel investors are private investors that invest their own money. Venture capital funds are run by managers who invest other people’s money, in addition to their own dollars.

Original Post: https://www.forbes.com/advisor/investing/what-are-angel-investors/