An angel investor is typically a high-net-worth individual or a group of individuals who invest their own capital in early-stage startup companies, usually in exchange for an equity ownership stake.
An angel investor may provide a one-time investment in a company, or they may provide ongoing support. They may also be called private investors, seed investors, or just “angels,” for short. Like any other type of investor, angel investors seek projects that have the potential to become profitable, in order to see a return on their investment.
There are several ways a new business might try to secure money for expansion or growth, from friends to bank lenders to joining a startup accelerator program. Angel investors are another option that can provide a capital infusion, but there are trade-offs when accepting funds in exchange for a stake in a new company.
Key Points
• Angel investors provide seed capital for early-stage startups, typically in exchange for equity in the company.
• Unlike Venture Capitalists, which work for bigger firms, angels invest their own money.
• In addition to funding, angel investors may also provide business advice, mentorship, and networking opportunities.
• Some angel investors are professional, and fund multiple projects at once. But some startups obtain funding from angel investors who are friends or family.
• Because most startups are high risk, angel investors must be prepared to lose money.
What Is an Angel Investor?
If you’ve ever watched the show “Shark Tank,” you’ve seen one type of angel investor in action. On the show, a group of wealthy investors listen to pitches from entrepreneurs who are looking for funding for their small business or startup. In exchange for providing seed money, these investors generally get an ownership share in the business.
Angel investors can also be personal friends or colleagues of the entrepreneur. Typically they’re wealthy enough to provide a significant amount of money, despite the risks the startup could fail.
Again, angel investors use their own funds when investing in new projects. Venture capitalists, by contrast, work for firms that supply funding for new ventures.
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Who Can Be an Angel Investor?
Angel investors were once required to be accredited investors, which demanded, among other things, that they have a net worth of $1 million in assets, not including personal residences — or yearly income greater than $200,000 alone, or $300,000 for a household for the previous two years. (Anyone who holds a Series 7, Series 65, or Series 82 in good standing also qualifies).
This was meant to limit angel investing — which is a risky practice — to those who ostensibly had enough assets to safely dabble in it. In recent years, however, virtually anyone can be an angel investor, as long as they have the capital and the willingness to take certain risks.
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Ways to Become an Angel Investor With Less Cash
These days it’s possible to get involved in angel investing via a crowdfunding-type of platform, without putting tens of thousands of dollars on the line. A smaller investment won’t reduce the risk, but it may reduce an investor’s total loss. These crowdfunding platforms enable smaller investors to dip their toes in the water (picture a GoFundMe for your business idea):
Republic, StartEngine, and WeFunder are among the bigger platforms that provide investment opportunities for accredited and non-accredited investors — and potential funding options for entrepreneurs. Some platforms act as a marketplace of sorts, helping to match potential funders with the right project.
Would-be investors who are non-accredited would do well to familiarize themselves with Reg CF, or Regulation Crowdfunding, which dictates the terms and conditions for non-accredited investors (e.g., investing limits, income rules, and so on).
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What Are the Pros of Using Angel Investors?
There are a number of benefits to using angel investors to help finance a venture.
Less risk
If you take out a loan to finance your business, you’ll still be expected to pay it back, whether or not your venture is a success. Angel investors generally understand the risk of investing in a startup business, and may not expect any return on capital if the business goes south.
Expertise
If angel investors also happen to be experts in your business, they can offer advice and guidance based on their years of experience.
Credibility
Angel investors are often well-known in their field, and if they invest in your idea, it can boost your reputation and status to have them on board.
They’re Willing to Take a Leap
Unlike a bank, which may need more concrete proof that you’re onto something big, an angel investor might be more willing to gamble on a solid idea.
Better Chance of Success
Companies with angel investor interest stand a greater chance of survival than those with less angel investor interest, according to findings from the National Bureau of Economic Research. Having angel investment doesn’t mitigate the risk of starting a business, but it’s possible that having angel investors on board can provide some oversight or accountability that might be beneficial.
What Are the Cons of Angel Investors?
There are also some potential disadvantages to having angel investors.
Loss of Full Ownership
Angel investors often provide funding in return for a share of the business, so involving angel investors means giving up some of your control. It also means that if the business succeeds, they’ll share in the proceeds.
They May Add Pressure
Angel investors aren’t giving you money out of kindness and good will. They may be aggressive investors who expect to see a high return on their investment. If they’re sinking money into your venture, it may feel there’s more riding on your success or failure, and seek to influence business decisions.
Funding May Be Slow
Finding angel investors can take time, and the process of securing backers — and for the cash to find its way to your venture — can take even longer.
It’s a Competitive Market
Even if you have a brilliant idea, there’s no guarantee that you’ll be able to find backers for it. According to the University of New Hampshire Center for Venture Research, which focuses on trends in angel investing, in 2023 only about 24.4% of projects received angel investment. That said, there were 54,735 new ventures that did get funding in 2023 (although that was a 12.2% decrease over 2022 projects funded).
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Where to Find Angel Investors
Startups looking for early-stage investors can look in several places.
Friends and Family
In many cases, startups get some or all of their initial investment from friends and family who believe in their idea and want to support the venture.
High-Net-Worth Individuals
Networking within your business community may allow you to make connections with people who’d be interested in helping to back your idea. It can be helpful to join local business, trade, and community organizations. Attend meetings and trade fairs, and have your elevator pitch well-honed.
Angel Funding Groups
There are a number of sites that seek to match entrepreneurs with angel investors, including:
Angel Capital Association: A collective of accredited angel investors
Golden Seeds: A group whose members focus on women-led ventures
Angel Investment Network: A network that seeks to connect entrepreneurs with business angels
Crowdfunding Sites
While traditional angel groups seek to match entrepreneurs with accredited investors, as noted above, some crowdfunding sites allow lots of smaller investors to pitch in to move your venture along. You’ll likely have to apply to have your idea or business vetted by the site before they’ll present your project to their members.
The Takeaway
Angel investors are typically high-net-worth individual or group backers that support startup and early-stage business ventures. But lately, opportunities have opened up for individuals of all types to invest in companies that have recently launched.
For entrepreneurs, an angel investor can be an enormous help, both in terms of financing their dream as well as providing guidance if they have relevant business experience. On the flip side, some entrepreneurs may find there is added pressure to deliver when an angel investor is backing their startup.
Whether you’re interested in finding an angel investor for your own startup idea, or thinking of becoming one, there are a number of risks associated with this type of business. Consider the pros and cons in light of your own financial goals, as there are many different paths forward.
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FAQ
How much do angel investors usually invest in a business?
The amounts vary, and are influenced by the angel investor’s own status as either an accredited or non-accredited investor: SEC designations that set net worth and income criteria for investors. Angel investors tend to invest in the $25,000 to $100,000 range. Venture capital funds may be higher.
How do you pay an angel investor?
Most angel investors get an equity stake in the company in exchange for seed capital. If the company succeeds; that equity stake may provide a profit. If the venture fails, angel investors usually don’t expect the funds to be returned. These terms are set when the deal is made with the entrepreneur.
Do angel investors pay tax on any profit they earn?
Yes. The profit from a successful venture is taxed under capital gains rules. However, if the angel owns Qualified Small Business Stock in the company, the profit from QSBS is not taxed. Taxes are complicated, especially with high-risk angel investing, and it’s best to consult with a professional.
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