What are the Pros and Cons of Angel Investors?

When your startup is considering early-stage funding options, one of the possibilities for raising capital that you may be considering is working with one or more angel investors. Angel investors – those investors that are more organized and sophisticated than friends and family, but not quite as formal as a venture capital or investment fund – can offer real benefits, but there are also limitations or disadvantages that you will want to keep in mind before you move forward and accept funding from an angel investor.

What are the pros and cons associated with taking money from an angel investor for your startup? Our startup lawyers can provide you with the information you need, and we can speak with you today to learn more about potential angel investors you may be considering in order to advise you on your path forward.

Benefits of Angel Investors

Angel investors can be extremely beneficial to startup founders who are seeking equity financing, and especially those who have a particularly nuanced or distinctive idea that has not yet been market-tested in any capacity (and, accordingly, that may not be as attractive to venture capital firms). Unlike a bank, angel investors can offer significant funding in exchange for equity, which means you will not have to repay what they have invested, and often they are accustomed to taking more risk at an earlier stage than other investors. Often, angel investors themselves are current or former entrepreneurs or operators themselves, so they may have a strong sense of the process that your startup is currently going through.

Angel investors are often also more willing than venture capital firms, as we noted above, to take a chance on an especially exciting startup idea that may not offer the potential of home-run returns. Where a VC firm might require the potential of a 100x return, an angel investor might be satisfied with a ceiling of 5x return on their money. There are no hard-and-fast rules around angel investors. They can be first money in or come in alongside larger investors in later rounds. They can also bring strategic industry knowledge to the company and will sometimes take an active role as a director or advisory board member.

Potential Disadvantages of Angel Investors 

Potential disadvantages or downsides to angel investors often involve the equity they obtain in the startup they fund.

It will depend on the angel investor and what they are offering, but they may want substantial equity in your company, especially if they’re coming in very early. In addition to the potential downside of giving up a large chunk of equity (and potentially losing out on other forms of equity financing), angel investors sometimes require controls and input that go far beyond what a typical VC would require, since they’re often the only money in very early.

How much is “substantial”? It varies, but an angel or angel syndicate commonly ends up with a low-single-digit to low-double-digit percentage of your company, and angel syndicates often pool money to reach the high six figures or even millions. On a small early raise, handing over 10% to 15% to cover a year of runway is not automatically a bad trade, but it is a permanent one. Model what that stake is worth at your Series A, not just what it buys you today, before you sign.

Take Angel Money With Your Eyes Open

Determining the best source of financing for your startup in a seed round, or even in another early-stage round, can be complex and difficult. Knowing whether to work with one or more angel investors or to seek other forms of equity financing, or to take a different route entirely, is something that the startup attorneys at Triumph Law can assist you with today. Do not hesitate to reach out to our firm to discuss your startup’s plans and options for raising capital, and the benefits and disadvantages of the various forms of funding that startups typically consider. Contact us today to discuss your startup’s options.

Source:

sec.gov/resources-small-businesses/capital-raising-building-blocks/early-stage-investors