When the term was created, angel investors were people with high net worth who invested in companies at a very early stage. Over the years, these investors are not only people with high net worth, but also people with a good investment mentality and an enthusiasm for the world of start-ups. They can also be referred to as private investors, angel investors, or initial investors. Usually, your investment is made in exchange for shares in the new company or for convertible debt.
As this amount of investment is not usually very large, angel investors could also come from the entrepreneur's personal or professional circle. In certain cases, angel investors find interesting new companies through crowdfunding platforms such as Kickstarter. Their contribution mainly helps to boost companies or to get new companies out of difficult situations. An angel investor is a wealthy person who invests their own money in a company, usually a startup that is in the early stages of development.
This is welcomed by cash-hungry start-ups, who consider angel investors to be much more attractive than other, more predatory forms of funding. Therefore, angel investors focus more on the founding team and the potential of the idea before investing. Angel investors are usually people who have obtained accredited investor status, but this is not a prerequisite. Angel investors who create start-ups that fail during their early stages lose their investments completely.
While angels can make the difference between the growth or the closure of a startup, they are, first and foremost, investors. Most angel investors have leftover funds available and are looking for a higher rate of return than traditional investment opportunities. The funds provided by angel investors can be a one-time investment to help the company get off the ground or an ongoing injection to support and help the company overcome its difficult initial stages. 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.
Angel investors expect to take ownership positions in the companies they support because their capital is not guaranteed and they have no right to claim the company's assets. It is highly recommended that angel investors keep such investments at less than 10% of their entire portfolio to avoid losses, as they are almost always high-risk. Angel investors focus on helping start-ups take their first steps, rather than on the potential profits they can make from the business. 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.