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Pros and Cons of Angel Investors

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Understanding which type of investment is right for your business is essential to secure funding. Angel investors are one type of potential investor. They provide crucial capital to jumpstart business ventures that are in their early stages. This article will explain the advantages and disadvantages of seeking angel investment for your business.

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What is an Angel Investor?

An angel investor is a person who provides financial support to early-stage companies. These investors tend to be wealthy individuals who use their wealth to get new businesses off the ground. They may offer a single sum of money or a series of payments. 

Angels typically provide cash in exchange for equity shares in the business. Driving up the value of your business is the aim of many angels, as they will be interested in getting a good return on their investment. Some angels are passionate about the companies they invest in and their products and services. In this case, they may not prioritise seeking a return on their investment but would nonetheless wish to see your business succeed. 

Where there is more than one angel investor, it is usual to find a single angel investor acting as the lead investor (the ‘lead angel’). The lead angel will coordinate the investment deal on behalf of the other angel investors. Together, a group of angel investors is called a syndicate.

Advantages of Angel Investors 

1. Access to Capital 

The first and most essential advantage of angel investors is the capital they provide to startups and early-stage companies. You can channel this capital directly into your business and the development of operations, products, and expansion. The money angels offer is an alternative to traditional funding methods such as bank loans. 

2. Mentorship and Guidance

In addition to being a source of capital, angels can also provide valuable guidance and mentorship throughout your relationship. An angel investor can have specific industry expertise and a valuable network they are willing to share. They are often expert business people excited by the prospect of helping others. Many angels find the mentorship aspect of their investment very fulfilling. Their guidance can be instrumental in helping your new business overcome initial challenges and gain a foothold in the market. 

3. Flexible Terms

As angel investors are providing their own money, the terms of your agreement with them may be negotiable. Compared to more traditional financing routes, this route has a higher degree of flexibility. You may negotiate a deal that suits your specific needs. This flexibility means that startups with unconventional business models can gain funding where they otherwise might not be able to via traditional routes.

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Disadvantages of Angel Investors 

1. Dilution of Equity and Control

Accepting angel investment can mean giving up a portion of your equity in your business. Typically, angels will not expect you to repay the money they provided. Instead, they may look for a return on their investment through their stake in your company.

Angel investors will usually take small stages in a company, not exceeding 25% of the business’ total share capital.

When business owners share ownership and give a portion of equity to another, they dilute their level of ownership. In addition, as an investment condition, the angel investor may appoint one or more individuals to your company’s board of directors

Providing equity in exchange for funding or appointing additional directors to the board means that you will lose some of your control over your business’ direction. Sometimes, this loss of ownership can be significant. If this is the case, you may have less say in critical business decisions.

2. Potential for Interference 

There is a potential for excessive interference depending on the agreement you share with your angel investor and how you view your relationship. Some angels can become overbearing and over-involved in the daily operations of the businesses they invest in. This interference may lead to conflict. You may also have differences in vision, strategy, or decision-making. 

Choosing an investor who you think matches your business plan and company’s needs is vital to mitigate the risk of conflict. Discuss with your potential angel what role they want to take before you agree to accept their funding. 

3. Feeling Pressure

Business owners can feel pressure to deliver as some angels expect a high return on their investment. This pressure can be challenging to handle, especially with so much to consider at this initial stage of your business. Ensure that you discuss expectations with the potential investor. Be realistic and avoid over-promising. 

Key Takeaways

Angel investors can be a valuable source of capital, offering an alternative to traditional funding methods such as bank loans. Angel investors can also provide mentorship and guidance, leveraging their industry knowledge to help early-stage businesses succeed. Entrepreneurs can often achieve flexibility with the terms of the investment agreement. This flexibility can benefit businesses with unconventional business models or uncertain growth trajectories. 

There are drawbacks to consider that are associated with angel investment. These include the dilution of equity, potential interference in your business operations, and the pressure to deliver significant returns. It is crucial to carefully assess these factors before seeking angel investment for your early-stage business. 

Bear in mind that the specific advantages and disadvantages of angel investors can vary depending on:

  • the individual investor;
  • the terms of your agreement; and
  • your industry.

If you need assistance choosing the right type of investor for your business, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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