By Dave Lavinsky
While angel funding is a great source of investment for a small business, it does come with risks. The first risk is that the ultimate cost of the angel funding can be very high. Some angels will want a percentage of the company’s revenues (often 10% or more). Others will want equity stakes. These equity stakes, if and when the company exits, may end up resulting in sizable payouts to the investors.
The second risk has to do with the angel’s control over the company. This usually is the case when signing a deal to be funded by an angel group. Review the term sheet carefully as there may be terms that give the angel investors undue control in your company. This could include firing you as the CEO, and blocking additional rounds of capital being raised, among others.
However, there are big positives regarding angel funding. Getting funding from an angel investor can be easier than applying for a loan. The requirements are minimal, and the process, particularly as compared to raising venture capital, is much faster. Likewise, the chances of raising angel funding are many times higher than raising venture capital.
Here are some tips for finding and securing angel investors for your company.
1. Find an Investor With Sufficient Knowledge of the Trade. You will often be more successful if you choose an angel investor who has adequate knowledge of your company and its trade. This is because the investor may want to help you run the company (at least by giving guidance and advice).
Therefore, getting funding from an investor who has previous experience with similar companies can be beneficial. A few things that entrepreneurs should look for are the angel’s:
- knowledge and expertise in the business
- previous industry experience
- creative ideas that may help the company
The size and diversity of the angel’s pool of contacts is also a factor to consider. The contacts may help you in running and marketing your business.
2. Gather Enough Contact Angels. Look for several angel investors before signing an agreement. This lets you choose the best one(s) for your company’s needs and requirements.
3. Check the Angel’s Investment Criteria. The angel investor’s criteria is another important thing to study. Choose the most suitable angel who can provide the amount needed for the business.
The entrepreneur should know that angels already have predetermined investment criteria. This usually involves around $25,000 to $250,000 depending on the investor’s choice.
Other investment criteria include the company stage and industry. There are angels who prefer to invest in startup companies while there are others who choose to invest in existing businesses seeking to expand. Knowing the right criteria that suits the angel’s requirements will help greatly in choosing the right investor.
4. Get Professional Legal Help. It is recommended to get legal guidance before deciding on the right funding agreement. Work with counsel to make sure the deal terms are what you want and need.
In summary, there are negatives associated with angel funding. But there are also big positives that make angel funding a great source of capital. Watch this angel funding presentation to learn more about how to successfully raise angel funding for your company.
Dave Lavinsky is the president of Growthink, a consulting firm that, since 1999, has helped over 500,000 entrepreneurs develop business plans, raise funding and grow their companies.