Is an angel investor right for your business? When start-ups are too big for friends and family, but not big enough to attract venture capital, they turn to private investors called angels to take their companies to the next level.
1. What is Angel Investing?
Angels are private investors who will give you startup money in exchange for a certain percentage of ownership in your business. They’re called angels because, in the best-case scenario, the cash and advice they provide can seem like a gift from the heavens.
2. What kind of companies do they invest in?
Typically, they like to invest in fast-growth businesses, where they will get a high return on their investments, so if you’re starting, say, a mom-and-pop dry cleaner, this type of funding isn’t for you. Ideally your company should be innovative and poised to make a sizable dent in the marketplace.
In best case scenarios, the cash and advice provided by angel investors can seem like a gift from the heavens.
3. When is the right time to approach angel investors?
While your business is a start-up or in it’s early stages, you should have reached certain milestones:
- You’ve already got customers for your product or services, and they are willing to recommend you.
- You’ve invested your own funds in the business. These days you must have “skin in the game” before approaching angel investors.
- You’ve got a strong business plan that indicates fast growth in the next few years. Your business plan should reflect a through knowledge of your business sector and your compeititors.
- A strong presentation that captures your business propositon quickly should be in place, as well as a website where pertinent facts about your company can be found.
4. Where can you find angel investors?
You can find angels through groups called angel networks. Some networks specialize in sectors such as life sciences or technology, and others focus on startups in their geographical region. To find the right angel group, check out groups such as Vfinance.com which offers a searchable national listing. Another good source of information is the Angel Capital Association.
5. Choose angel investors who understand your field and share your goals.
You want to have people that you trust, whom you think will have an interest in your company and your industry and who will help you build it. Remember, an ideal investor will have the connections you need to help you find additional financing and strategic partners for your business in the future.
6. Find out how big a role an angel wants to play.
Some angels expect to be the only investor and to provide all the cash the company needs in one round. Others will expect to you turn to other sources of financing as the company grows. Make sure you ask an angel about his or her expectations, so there are no misunderstandings later. To verify that you’re talking with the right investor, look into the angel’s prior transactions.
Above all, determine how much management control the investor will have. Many angels expect to offer advice about growing the company—and for the entrepreneur to pay attention to it. They may demand a seat on the board of directors, and the right to approve major decisions, such as selling the company or raising additional funds. Don’t go along with an agreement you aren’t willing to follow if you do find yourself at odds with an investor.
7. Understand how much your company is worth.
There is no perfect formula for determining a startup’s valuation, so it’s a good idea to do some research on your own before selling a percentage of the ownership to an outside investor. Knowing the value will help you to obtain a fair price. Talking to other companies in your industry that have raised capital at a similar stage of growth can give you some idea of what your company is worth, but typically, it’s just going to be a negotiation process between you and your investor.
Of course, experienced angels will generally do their own homework on the valuation, so their offers will also give you a ballpark idea of what your company is worth.
8. Invest in advice from a lawyer.
Don’t take the do-it-yourself approach to drafting investment agreements, or you could face legal problems in the future. You must make sure there is compliance with securities laws. Consider the total cost of legal advice before you bring in outside investors. The process can be lengthy and expensive.
9. Consider offering stock options.
To attract talented employees, many startups issue stock options: the right to buy company stock at a set price considered attractive at the time. Even if you aren’t sure you want to go this route initially, you may change your mind later. To avoid future conflict with your angel, you should negotiate whether stock options should come from your ownership interest, the investors’, or a combination of both.
10. Keep deals with friends and family formal.
If you opt to bring in family, friends, and acquaintances as private investors, put each investment deal in writing with your attorney and strongly encourage them to review it with their own lawyers to make sure they understand it thoroughly. Otherwise, you could find yourself facing difficult situations and ruined personal relationships later. They should know from the beginning that this is a formal investment, and not something they can back out of at a moment’s notice.