Angel funding is typically the initial investments made after friends and family have supported a promising startup
Angel investors are wealthy individuals who invest in startups and early-stage companies, taking on the high risk associated with startup funding.
The startup and growth of an entrepreneurial enterprise typically are broken down into five stages: the Concept (or Seed) Stage when the business is being organized by the entrepreneur and financed from personal funds and Stages I through IV which begins with the sale of the product and ends at Stage IV with a high growth operation that is attractive to outside buyers.
The angel Investor typically participates during the Seed Stage or Stage I and will provide funding to assist the business in exchange for equity in the startup company. For taking on this risk of early-stage startups, the angel will expect a high rate of return on investment and seek back their principal in about 5 to 7 years.
As the startup grows, venture capital firms become the source of funding, taking an even larger equity to fund accelerating growth.
The exit of an angel investor occurs when the company makes a public offering or when it is acquired. The Angels participate for a very defined period and want to cash out their equity stake, so they can invest in another high-growth startup. Having exit strategies is very important and the entrepreneur should know in advance before approaching a potential investor.
The owners may even choose to buy back the ownership they gave up. Whenever a venture is seeking funding, it must have the potential to achieve very high sales growth in a short period of years.
In some cases, the startup’s owners may have the option to buy back the ownership stake they initially gave up to the angel investor. This is often referred to as a buyback clause or a redemption right. The buyback clause can be included in the investment agreement between the angel investor and the startup. It allows the founders or existing shareholders to repurchase the shares from the angel investor at a predetermined price.
The buyback option can be exercised after a certain period of time or when specific conditions are met. This gives the owners an opportunity to regain control of the company and benefit from its future success without diluting their ownership further. It also provides a sense of flexibility and control for the founders, especially if they believe that the company has strong growth potential in the long run.
However, it is important to note that exercising the buyback option may require the startup to have sufficient funds to repurchase the shares from the angel investor. This could be challenging, particularly if the company is still in its early stages and has limited financial resources. Additionally, the buyback price should be carefully negotiated to ensure it is fair and reasonable for both parties involved.
More than Just Funding
Many angels seek to be more than a passive investor and will serve as an advisor to the business owner. They may be able to bring in other resources such as an industry expert, contacts and even possible employees who may be needed. Many angels join advisory boards or become a member of the board of directors.
The business owner should research and explore the background of the angel or angels investing in their business to learn how involved the angel will be. Defining the level of involvement is extremely important to ensure no friction emerges between ownership and the investor. Seek out experienced angel investors who have expertise or industry experience for your venture.
Checking the experience of others who have been funded and worked with the angel is also very important. Since angels are individuals with money and have varying levels of experience, working styles and personal values, the angel relationship may be quite different with owners.
In preparation for angel investing, the entrepreneur needs to establish some key fundamentals about the venture in advance of an angel meeting. Have the business plan well written, identify the management team that is critical to success, protect any intellectual property associated with the core business, and be prepared to pitch the business to many active investors and groups associated with the angel and venture capital communities.
Locating active angel investors will take time and networking within the startup ecosystem where you will find an angel investor network and within the more established venture capital community.
Also, contact the Angel Capital Association to learn more about the community of angel investors, any events or training programs they may offer for entrepreneurs.
