If you have not been successful in your efforts to secure funding for your latest business venture, an angel investor might be your answer. An angel investor specializes in offering financial backing for the small-business owner and entrepreneur within your startup stage and beyond. As the funds they bring to the table may make all the difference in whether your concept ever gets off the ground, there are a few trade-offs you must be alert to. 
Pro: An Angel Investor is willing to take a Risk
Being eligible for a small-business loan typically entails hopping through a few hoops — challenges you might not be faced with while dealing with the angel investor. This is because these, "angels," are often established entrepreneurs themselves, who comprehend the level of involved risk and are at ease with taking it on. Even if the bank agrees to offering you the funds, they might restrict the quantity you’re able to borrow to curb the possibility for their loss. On the other hand, angel investors usually do not balk at making a bigger investment if they believe in the organization’s potential. An angel investor can usually, "smell," a good idea and a good deal.
Con: An Angel Investor Might Set the Bar Higher
The disadvantage of the angel investor’s higher tolerance for risk is that also they usually have higher expectations. They are in business to earn money, and as there is a significant quantity of funds on the line, they are going to want to witness a payoff, just like anyone else is. It isn’t unusual for an angel investor to expect a rate of return that equals 10 times their original investment inside the first 5 – 7 years. When you are being held to this type of standard, the pressure to generate may be intense. If you are considering angel investors, you must determine whether the startup is within a position to expand at the rate the investor expects.
Pro: Money is not a Loan
As you take out your small business loan, your bank will expect you to repay it, irrespective of whether the venture actually succeeds. An angel investor operates inside a different framework. They’ll offer you the capital needed to get the ball rolling, and in exchange, they receive an ownership stake in your company. If the startup takes off, you’ll both reap the financial rewards. If your company falls flat, on the other hand, an angel investor won’t expect you to pay back the offered funds.
Con: There will be Strings Attached
Though you aren’t officially obligated to pay back your investor the capital they offer, there is a catch. As you hand equity over in your business as a portion of the deal, you essentially are giving away a portion of your future net earnings. The percentage of ownership the angel investor requests usually depends on how much they are investing. If you expect the startup to be extremely successful, it might add up to lots of money you will not have the ability to lay claim to. As you have an offer on the table, carefully assess the terms to ensure the quantity of ownership the investor is asking for does not eat into your own capability of realizing a profit.
Pro: Odds of Success Rise
Angel investors typically bring years of expertise to the table of a start up and they already understand the ropes it’ll take to bring success to your starting a business. Scientists from the Harvard Business School discovered that ventures backed by angel investors are more likely to remain in business longer, have substantial growth, and witness a greater rate of return. If you are seeking guidance and advice in addition to funding, angel investors offer a plethora of precious knowledge.
Con: You Aren’t in Full Control
An angel investor won’t shell out the big bucks without taking an interest in how the funds are used. If you are expecting them to take a hands-off approach, you might be in for a rude awakening. It is more likely that the angel is going to want to take an active part in making decisions which affect your organization’s outcome. Even if they give you control, you will still be accountable for explaining the reasons behind some of your decisions. Prior to starting to look for your angel investor, you must ensure that you are at ease with permitting somebody who isn’t intimately familiar with you or your business to play a role in how it is run.
FAQs
The primary disadvantage of using angel investors is the loss of complete control as a part-owner. Your angel investor will have a say in how the business is run and will also receive a portion of the profits when the business is sold.
What is a disadvantage of using angel investor funding? ›
The primary disadvantage of using angel investors is the loss of complete control as a part-owner. Your angel investor will have a say in how the business is run and will also receive a portion of the profits when the business is sold.
What is an advantage of a startup getting funded by an angel? ›
Less risk: When you receive funding from an angel investor, there's typically less risk than if you take out a small business loan. Unlike loans, you're not responsible for paying back the funding from an angel investor because they receive equity in exchange for financing.
Why would a business prefer to work with an angel investor instead of getting funding from a bank? ›
As such, angel investors may be more likely to take investment risks that are virtually unheard of among banks and traditional debt financing providers. Your company can take less risk. Often, angel investors don't require repayment if your company fails.
What are the benefits of an angel investor? ›
The Advantages of Angel Investors
Having an angel investor means your business doesn't have to repay the funds because you're giving ownership shares in exchange for money. Angel investing is usually reserved for established businesses beyond the startup phase.
What are the advantages and disadvantages of angel investor? ›
Advantages and disadvantages of business angel funding
- BAs are free to make investment decisions quickly.
- no need for collateral ie personal assets.
- access to your investor's sector knowledge and contacts.
- better discipline due to outside scrutiny.
- access to BA mentoring or management skills.
- no repayments or interest.
What is a risk of working with an angel investor? They might be more personally involved in the business than the entrepreneur wants. They might not care about the business or their return. They might not give the money they agreed to. They might steal the business idea.
Why do startups need angel investors? ›
The primary reason angel investors and other experienced investors choose to invest in startups is to target better returns than those typically available from traditional mainstream investments. Investing in startups and early-stage businesses at the right entry price is critical.
How do angel investors help startups? ›
An angel investor provides initial seed money for startup businesses, usually in exchange for ownership equity in the company. The angel investor may be involved in a series of projects on a purely professional basis or may be found among an entrepreneur's family and friends.
Why not to use angel investors? ›
Cons of angel investment
Loss of control and ownership: the most obvious disadvantage of raising financing through angel investment, is the loss of ownership and control of the company as founders may find themselves giving away between 10% and 50% of the shares in their company.
What percentage do angel investors take? The percentage of ownership that angel investors typically take in a company can vary, but typically it is between 10-20%.
What ROI do angel investors expect? ›
The average ROI for angel investors is 27% within 5 to 7 years. However, it is important to keep in mind that angel investing is a high-risk, high-reward venture. While some angel investors may see returns of 10x or more, others may end up losing all of their investment.
How successful is angel investing? ›
Angels who spend less than 20 hours evaluating a deal realize an average return of 1.1 times their capital investment. Those who spend more than 20 hours have an average return of 5.9 times capital. Angels who spend more than 40 hours enjoy an average return of 7.1 times capital.
Is angel investment a good idea? ›
There's no doubt that angel investing offers you a great way to grow your money while also offering an entrepreneur a valuable source of finance. However, before diving into this field, equip yourself with all the information to help you make an informed decision.
What are the three risks that angel investors are focused on? ›
The list of high level risks is long and includes financing risk, technical risk, and market risk.
What are the biggest challenges for angel investors? ›
One of the biggest challenges small businesses face when seeking angel investment is that they often lack a proven track record of success. Angel investors typically want to see that a company has a history of profitability and growth before they will consider investing in it.
What are the disadvantages of angle funding? ›
The primary disadvantage of the business angel funding model is that business owners commonly give away between 10% and 50% of their business start-up in exchange for capital. After investing their money in a business start-up, most business angels take a proactive approach to running the business.
What is the failure rate of angel investors? ›
50%-70% of individual angel investments result in a loss of some capital, according to the most authoritative academic data; the same is true for VC deals.
How do angel investors get their money back? ›
Angels get their payback through an exit that lets them liquidate their stake and potentially make a profit that's based on the percentage of the business they own. Generally, investors will pre-plan the details of the exit when negotiating the term sheet before they invest in the startup.
What happens to angel investors if a startup fails? ›
The Impact on the Investors
If the startup fails, they will not only lose their original investment but also any potential returns that they might have earned had the startup been successful. If the venture capitalists are unable to recoup their investment, they will be forced to write off their losses as bad debt.
There are, however, a number of words of wisdom to take on board and pitfalls for a business to avoid when taking their first big step. A lot of advisors would argue that for those starting out, the general guiding principle is that you should think about giving away somewhere between 10-20% of equity.
Do angel investors take a salary? ›
The salaries of Angel Investors in the US range from $31,690 to $110,080 , with a median salary of $56,770 .
What is the average equity for angel investors? ›
The amount of equity angel investors typically seek averages around 20 percent, with some backers asking for as high as 50 percent stake in your startup.
How long should angel investment last? ›
More often than not, angel investors will wait 7-10 years before they can cash out at the company's first (or next) liquidity event. The best angels plan around their investments illiquidity, and focus instead on helping their ventures reach their full potential. Focused and Up-to-date.
What are some risks of angel investment? ›
The list of high level risks is long and includes financing risk, technical risk, and market risk. As angel investors, you need to be aware of the key risks you are taking with your investment.
What are the disadvantages of angel broking? ›
Go to broker website
| Pros | Cons |
|---|
| • Many asset types | • Only available for Indian citizens & residents |
| • Good educational materials | • Only for Indian market |
| • Demo account | • No credit card deposit |
Pros and Cons of Venture Capitalists
| Advantages of Venture Capital | Disadvantages of Venture Capital |
|---|
| Open To Risk | Giving Away Shares |
| Hands-on Support | Pushed Too Far, Too Fast |
| No Repayments | Distraction |
| Networking Opportunities | Hard To Get The Right Deal |
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An angel investor typically gets paid through a return on their investment, either when the company they invested in goes public or is acquired. This return can be structured in the form of a one-time payout, or through a series of payments over time.
Do angel investors lose money? ›
If the startup fails, as up to90% do, the investors lose the money they've put in. But if the venture succeeds, the investors receive returns proportionate to their equity stakes. Angel investors in Uber, for instance, invested as little as $5,000 apiece when the ride-hailing startup was little more than a concept.
Why do angel investors invest in startups? ›
The primary reason angel investors and other experienced investors choose to invest in startups is to target better returns than those typically available from traditional mainstream investments. Investing in startups and early-stage businesses at the right entry price is critical.
Risks to keep in mind
Angel investing can be risky since the investments or businesses are unproven. According to FundersClub, an online investing forum for startups, 75% to 90% of startups fail. While making money is possible, many angel investors lose their entire investment.
How much do angel investors expect in return? ›
On average, potential angel investors expects to see a return of about 27% or 2.5 to 3 times their initial investment within 5 to 7 years. This means that if an angel investor invests $100,000 into a company, they expect to see a return of $250,000 to $300,000 over the next 5 to 7 years.
