In exchange, they receive an equity stake in the company and expect to make a profit if the company is successful. Because they are owners, angel investors usually make money only if the business is successful. This position should motivate them to help add as much value as possible. In addition, angel investors not only provide funding to start-ups, but sometimes they also offer consultations, networking opportunities, connections, advertising, etc.
There is a high probability that most of the startups that an angel investor invests in will fail and offer virtually no return. Some angel investors may demand a significant ownership position and you may end up selling more of the company than you had planned. Angel investors or private funders are people with high net worth who provide capital to early-stage startups in exchange for shares in the company. Angel investors are generally interested in high-growth, high-potential start-ups that can earn several times their original investment.
That's why angel investors are called “angels” because they help startups when no one else is ready. Angel investors often form “angel groups”, in which they evaluate companies and invest together, pooling resources to make larger investments. Angel investors can invest even if a company cannot obtain funding from a bank or financial institution. Even if you think your company offers exceptional growth potential or a game-changing product, angel investors may still reject your proposal.
While angel investors usually represent individuals, the entity that actually provides the funds can be a limited liability company (LLC), a company, a trust, or an investment fund, among many other types of vehicles. An angel investor usually provides capital in exchange for shares (company shares) or convertible debt, which is a loan that can be converted into equity at a later date. This is why professional angel investors seek opportunities for a defined exit strategy, acquisitions, or initial public offerings (IPOs). These types of investments are risky and do not usually represent more than 10% of the angel investor's portfolio.
The exit allows the angel investor to liquidate their stake and even make a profit if the company is successful. Angel investors offer more favorable terms compared to other lenders, since they tend to invest in the entrepreneur starting the business rather than in the viability of the business.