Different funding opportunities exist for people who are seeking startup capital. These funding opportunities can range from taking out a small business loan from the local bank to borrowing money from relatives and friends. Another option to obtain necessary startup funding is through an angel investor. With several different funding opportunities available, it is important to understand the ramifications of each loan in your business pursuit.
Angel investors and equity financing
Often times, when a prospective entrepreneur exhausts all of their immediate funding sources (personal savings, borrowed money from friends and family, and bank loans), they turn to angel investors to raise capital. Angel investors will provide the amount of needed funding to the entrepreneur in return for equity capital. This means that the new business will be funded in exchange for ownership interest in a company. This interest usually comes in the form of stocks or some other form of ownership that converts to stock. Unlike traditional debt financing that requires immediate payment over time, equity financing does not involve repayment of the borrowed money since angel investors desire equity ownership stake.
Angel investors and their exit strategy
Before investing in a business, an angel investor will expect an exit plan, the agreeable strategy by which they will cease their ownership in a company. This can come in the form of an acquisition, initial public offering, earn-out, merger, or debt-equity swap. Angel investors who hold equity ownership in a company will often prefer to sell their shares in an IPO (or initial public offering), while others may prefer the sale or merger of the company.
Angel investors and experience
When angel investors invest in a company, they usually request a seat on the Board of Directors and/or take an active management role in running the company. This can be perceived as both good and bad. It is good in the sense that often times experienced angel investors will provide valuable insight to the entrepreneur, mentoring them throughout the venture in order to ensure the invested company’s success. However, there is a downside to giving up a certain percentage of ownership to an angel investor. The more ownership that the entrepreneur gives up, the more overall control they lose.
Angel investor capital requirements
In order for an entrepreneur to obtain startup capital from an angel investor, they will need to devise a well-written business plan, present accurate cash flow projections, the financial history, and personal and business credit profiles. Some angel investors may request the latest tax return information and bank statements from the past three years. It is necessary to present a well-detailed business plan and have confidence in the plan so that you can convince the lender that you are a low-risk investment when obtaining startup capital. If the entrepreneur appears confident and has good business sense, then they will most likely have no problem in finding their desired startup capital for their business.
Equity financing is a type of loan in which angel investors invest in a business in return for an ownership percentage in the company. They bring to their invested company solid experience with the ultimate goal of lucrative returns since they actively mentor and give advice to the new entrepreneur. The new business owner has to have a great business idea with the prospect of a high return on investment in order for an angel investor to consider an investment. The entrepreneur has to also be impressive in their pitch and business plan.