When wealthy people offer financial help to businesses in need of financing, they are given the title of angel investors. They are known for providing seed capital for startup companies prior to going public. In return for their financial support, an angel investor is given part ownership in that business.
It is now possible for people of all income levels to participate in this type of investing. Many people want to know how does angel investing work.
Angel Investment Agreement
A company offering an angel investment agreement could be offering the angel investor preferred stock. This is a type of stock that comes with more privileges than common stock purchased on a stock exchange. There are also types of angel investing deals that consist of bonds or convertible debt. This gives the angel investor the option of converting them into common stock sometime in the future.
Venture Capitalists And Angel Investors
An angel investor will provide financing for companies at an earlier stage of their development when compared to venture capitalists. These are companies with a value of less than $5 million. An angel investor can fill the need of a company that has gotten its initial investment from acquaintances, family, friends and prior to a venture capital firm become part of the company’s development. This is a time in the process when the business idea has been successfully tested for generating acceptable revenue. The business needs help to become a larger scale company. Venture capitalists are from a business structure with many others involved in the decision process. An angel investor will be a solo investor. They can determine who they will invest in based on their personal discretion. An angel investor does not need to get approval for their investment decisions.
An angel investor does not have the same pressure on them as a venture capital firm. They can only invest in businesses that interest them. As an early backer of a company, they are usually able to have a closer relationship with the company.
There is more risk associated with angel investing when compared to traditional investing. Most angel investors believe the rewards are also much higher. In most cases, angel investors use only a small portion of their portfolio. They will invest small amounts of money in a variety of startup companies. This means an angel investor can invest in 30 companies and have 20 of them fail but still succeed. It is possible the remaining 10 could become extremely successful.
Part of being an angel investor is setting an exit point. It’s possible to make a huge return on a small investment. The reality is an angel investor won’t make any money until the profits are in their bank account. Any increase in the value of share aren’t realized until they are sold. This is why an angel investor should establish their exit point. This is when they can take their investment after making a substantial return. This involves dilution, which is an important aspect of angel investing. It is important to be aware of what rights are in places for dilution. This is something that should be known prior to considering investing. If an angel investor believes a business has long-term potential, they could sell half of their share and keep the rest as the company increases in value.
Investing As An Angel Investor
There is nothing better than choosing the right startup business. It’s important to remember it ‘s not important for an angel investor to have huge returns with every one of their investments. Having one company out of 15 become very successful is sufficient to make angel investing extremely profitable.
Anyone Can Be An Angel Investor
There was a time when being an angel investor was something the majority of Americans could not even consider doing. It is now possible for someone to become an angel investor for as little as $50. Congress has made it so people from many different walks of life can take advantage of the opportunities associated with angel investing.
The businesses associated with angel investing will come with a very different risk-reward profile than a large established company. Success will depend on developing the correct strategy for this type of investing. When someone starts angel investing, it is best to contact an experienced investor to learn how does angel investing work.