Finding Your Wings: the Basics of Angel Financing 

     

Angel investors are typically wealthy individuals who make private investments in high-risk, early stage ventures. They often provide the first round of financing for start-up companies before the business is established enough to attract venture capital funding.

Individual angel investors usually contribute between US$25,000 to US$100,000, although they often act in groups to complete larger deals as well as facilitate the due diligence process and spread investment risk. An angel financing group may invest up to a total of US$1 million for a single round of financing. As well as providing capital, angel investors also offer advice, expertise and business contacts that can be beneficial to the new venture.

Before seeking angel financing, a start-up must be prepared with a comprehensive business plan and a clear idea of the financing terms it is seeking. Angel investors' decisions will depend largely on their confidence in management as well as the market opportunities and profit potential for the company. They seek high-growth prospects, although there is no particular industry, geographic focus or business model that predominates in attracting angel funding.

The major benefit of angel financing is that it provides access to capital when other funding options are not available. This can allow a company to hire key employees and develop its business model to the point where it can seek larger scale, second-round financing.

The due diligence process is typically not as involved, and funds are secured more quickly, than is the case with venture capital firms or traditional lenders. Other benefits to the entrepreneur include access to the expertise and business networks of the angel investors involved. In addition, the growing trend of angel investor groups means that an individual venture can raise significant capital in a single financing deal without the need to negotiate separately with each investor.

However, before entering into an agreement, management should take into consideration some potential restrictions that angel funding may impose. Angel investors usually receive an equity stake in return for their investment. In some cases the angel may ask for equity shares that give them preferential rights over common stock holders or that include repayment provisions.

In these cases, the company needs to be confident that it can meet any payment obligations and consider the implications of the equity structure on raising future capital. Other considerations include angel investors' requests for Board representation, rights of first refusal in subsequent funding rounds and negative covenants which require the company to seek approval before taking certain actions (such as issuing more stock). Such terms do not necessarily impede initial development of the business, but they should fall away based on defined criteria so they do not unduly restrict future capital raising or management operations.

Angel financing therefore represents an invaluable source of first-round financing for start-ups and high-risk ventures. Benefits for both the company and the investor can be great provided expectations are well outlined and the financing agreement is structured to meet the needs of both sides.

Other resources

  • Business to business finance and Loan agreements
    Many small businesses turn to traditional lenders when they are ready to open for business. They gather together their business plan and head to a bank in the hopes that the bank will fund their venture. For many small business owners that means using their personal finances as security and that is a terrifying proposition. The Best Finance Tips for small business are those that help them grown with minimal risk
    Read more: Business to business finance
  • Top Business Plan Mistakes to Avoid
    Even the best business idea and most competent management team will fail to raise capital if the company’s business plan is of poor quality or contains avoidable errors. The following are some of the most important mistakes to avoid.
    Read more: Top Business Plan Mistakes
 

Private equity intelligence

 
Processing time: 30 (0) ms