Is an Angel Investor Right for My Business?

Pros-And-Cons-Of-Angel-Investors

Many startup companies need outside funding to get their business off the ground. Traditional means of acquiring capital include business loans, boot strapping, mortgages, and funds from venture capitalists. Startups now have access to another source of capital: angel investors.  According to the Angel Capital Association (ACA), angel investors are high-net-worth individuals who invest their money into a startup business for a share of equity in the business.  Angel investors come in at the startup level or in the early stages of the company’s life. Angel investors then exit, with a profit, when a larger company purchases the startup.  Startup companies must approach entering into an angel investment arrangement with care – while there are many benefits to having an angel investor, there are just as many risks.  The Los Angeles startup attorneys with Startup Company Counsel dedicate their time to advising startup businesses on the best avenues for seed financing.

 

Angel investors provide start-up companies with a large portion of early-stage financing. According to the ACA, angel investors contributed $24.1 billion in startup revenue in 2014 for approximately 73,000 businesses. That number continues to grow.  Nearly 300,000 people contributed money to businesses as an angel investor within the last few years.  The total number of investors with a net worth of a minimum of one million dollars is nearing four million investors. Despite the high net worth of these individuals, however, the ACA suggests startup companies considering using angel investors as a source of capital should use those only  accredited by the United States Securities and Exchange Commission.

Angel investors are not venture capitalists or venture capital firms. Angel investors become involved in startup at the company’s earliest stages and contribute their own seed money or working capital. Conversely, venture capitalists do not use their money, rather, they use money from funds to contribute to the business. Venture capitalists contribute in rounds, whereas angel investors invest their money at one time at the earliest stages of formation. Generally, venture firms invest in startups with solid traction in terms of growth and contribute about $2 million per round of financing. In contrast, angel investors generally contribute during the initial stages of the startup and contribute between $5,000 and $100,000.  However, a group of angel investors can come together to invest a larger amount of money in a company.

A startup should seek the guidance of an established Los Angeles business law firm to fully comprehend the positive and negative aspects of doing business with an angel investor. Receiving financing from an angel investor comes with significant drawbacks. First, the angel investor will have control over some part of the company because of their ownership interest. Angel investors have a commitment for a period ranging between three and seven years. After that, the angel investor will want their investment back, with interest. Consequently, depending on how you entered the arrangement, you might need to sell your business so that the angel investor can get their investment back.

Not only will the business need to research the angel investor, angel investors will perform their due diligence on the startup as well. The prospective investors will need to know whether your startup will be profitable within three to seven years. They will want to be certain the company is competently managed. Further, the angel investor will need to know about the product or service offered, its marketability, and the competition for the product or service within the given industry.  Potential angel investors will review the company’s business plan thoroughly. After that, the angel investor can make an offer for funding.  If the business accepts the offer, the parties must enter into contracts regarding the following: amount of funding; the timing of the funding; the amount of equity stake the angel investor will take; whether the angel investor will sit on the board of directors of the company; interest payments; obligations upon default; exit strategy; and duration of the investment.

Angel Financing – Consult with a Los Angeles Business Attorney

If you are considering angel financing as a means of seed funding for your startup, you should hire an experienced business attorney to advise you on the process. Angel investors are business-people, and although they may derive an altruistic benefit from contributing money to startup companies, they can potentially take a lot of control away from the business owner. Call the Los Angeles business lawyers at Startup Company Counsel for help at 408-441-7555 or submit your question online. The startup attorneys at Startup Company Counsel have vast experience in representing startup companies and helping them to obtain the seed financing required.

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