When a business is reading to move from a concept to start up status, the business owner is likely going to run into issues related to raising cash. The last thing any entrepreneur wants to do is immediately go into debt. Sometimes, that’s the only way a business is going to see the light of day. However, there are a couple of alternatives that are worthy of consideration because of the advantages they may offer the business.
As an investor with significant resources, you might be interested in investing in a start up business or two. In fact, there is an investment alternative that the investment community refers to as “angel investing.” You are probably thinking that is interesting terminology and perhaps something you would like to investigate further. The following information will go into some detail about how you could become an angel investor. You can consider angel investing 101.
What is Angel Investing?
An angel investor is an individual that invests money in start up businesses with more focus on the business getting started than making personal profits. In some cases, the angel investor will loan the money to the new business owner with a focus on later converting the loan to an ownership interest in the business. In most cases, the angel investor simply requests the ownership interest right up front.
The relationship between an angel investor and the business is usually one of mutuality. If the business succeeds, the angel investor makes his money through his ownership interest. If the business fails, the angel investor losses their money. In the case where a convertible loan agreement was signed, the angel investor has the option of calling or canceling the debt.
The Benefits of an Angel Investor to the Business
As alluded to earlier, debt is not a friend to a new start up business. It’s quite intimidating to the entrepreneur/owner to consider the business might fail, leaving debt out there to cover without the prospects of income coming in the door.
Angel investors tend to make things as easy for the new business owner as possible with favorable terms. In fact, most angel investors are highly successful individuals with a desire to share their good fortune to help someone else succeed. As successful business people, angel investors can also bring a wealth of business knowledge to the table, acting as somewhat of a mentor.
There is a caveat to these benefits. In exchange for the infusion of cash and the sharing of business knowledge, the new business owner will have to sacrifice some of their autonomy. Depending on the new business owner’s objectives, that could be considered either a good or bad thing.
What You Should Know About Becoming an Angel Investor
First and foremost, angel investing is not really intended for someone who has a strong profit motive in mind when investing money. The primary reason for this is a lot of businesses don’t succeed past the first year, which makes angel investing a risky proposition.
If you wish to proceed, you will have to fulfill some legal requirements. Prior to making any investments, you would need to register with the SEC as an angel investor. As part of the process, you will have to offer the SEC information that shows you have the financial means to serve as an angel investor. That requirement could be as high as $1 million in assets and a significant annual income stream.
Once you have fulfilled any legal obligations, you need to make sure you understand the risks involved with such endeavors. If the business fails, you will likely lose your investment. As an offset to the risk, you can negotiate for as much of the company as you can get.
As a “part owner.” you should get yourself involved in the business. That would certainly include offering your expertise where possible. With that in mind, you might want to refrain from investing in businesses that fall outside your knowledge base. You’ll also want to make sure you feel comfortable with your new business partners. That’s why identifying the right investment opportunities is so vital.
If all goes well, your efforts as an angel investor can be quite rewarding. If the business succeeds, you succeed on two levels. First, you’ll make money. Second, you can take great pride in being instrumental in giving new business owners a chance to realize their dreams.