One of the most difficult responsibilities of a prospective entrepreneur is finding
the necessary startup capital for his/her new business. Traditional
sources of funding, such as bank loans, do not have very flexible agreements,
often leaving the new business owner high monthly payments with accrued interest
and other additional mandatory fees. With this in mind, most prospective entrepreneurs
search for other options of raising capital in order to make their
business ideas a reality.
Different options of funding
There are various options of funding available for those who wish to start their
new businesses:
1. Selling equity
One way in which entrepreneurs can raise startup capital is by choosing to sell
their equity before deciding to borrow money from family and friends. By choosing
to sell equity in a company, the business owner acknowledges they will be giving
up a percentage of their business forever. Many
entrepreneurs believe this is a
rather expensive way of raising capital because of the percentage of ownership the
entrepreneur gives up.
2. Family and friends
On the other hand, family and friends also provide a valuable means for entrepreneurs
to acquire seed funding. The
money can be available almost immediately and paid back in an agreeable manner with
no accrued interest. However obtaining startup capital from family members and friends
can be problematic as well. They may feel obligated to have a say in all company
decisions, demand a respected seat on the board, and may even create family drama
in the workforce.
3. Angel investors
While the two previous sources of funding carry both advantages and disadvantages,
often times, they will not provide the entrepreneur with the full amount they need
for their startup. The truth is there is a good source of capital available to anyone
with a good business idea.
Along with a strong business plan, the prospective entrepreneur will most likely
find themselves an investor who is interested in investing in their concept.
An angel investor is an important alternative to consider since they will most likely
provide the answer to many of the financial problems first-time entrepreneurs may
face. Angel investors could be either individual
private investors or groups of investors who have experience in financing
startups and early-stage companies. However, an angel investor’s role is not soley
limited to providing startup capital. They are often actively involved in the management
of a new company and provide expert advice to entrepreneurs on how to move their
new business ahead.
What is an angel investor?
Angel investors are high net
worth individuals who are/were successful entrepreneurs and business executives.
They use their own personal wealth for investing in early-stage companies that have
the potential for vast growth and development. As experienced businessmen, angel
investors not only provide the needed capital for entrepreneurs but also play an
important part in guiding the company towards success. Through regular company involvement
in management, business decisions, and mentoring of staff, angel investors can turn
a young company into a lucrative enterprise.
Angel investors and equity capital
Angel investors can provide the basic capital for a new business in return for:
1. Capital in exchange for equity shares
When angel investors decide to invest in a company, they often expect company equity
in exchange for the capital provided. This can come in the form of a promissory
note that will be converted into a company equity position in the company after
the official opening of the new business. Typically, the angel investor takes no
more than 15-30 percent equity in their invested company, which is more than enough
to be a meaningful member of the board.
2. Stock options
Another exchange for angel capital can come in the form of company stocks. Common
stocks represent a unit of ownership in which the holder has voting rights in company
decisions, while preferred stock holders do not carry corporate voting privileges.
With stock options, the angel investor would hold a seat on the board and have the
power to postpone the dividend payments s/he would receive from his/her stock.
3. Assistance of associates
Often times, an angel investor may feel the need to have one or two of his/her associates
help out with regular company operations. By employing these acquaintances, the
angel investor will make sure his/her invested company is performing at its optimal
state. While many
entrepreneurs may feel overwhelmed that even more people are involved
in the company, s/he should learn to embrace any type of help that experienced angel
investors provide.
Conclusion
Aspiring entrepreneurs should keep in mind that a very good source of money for
their new business can come from an angel investor. This is the kind of business
investor that can provide immediate funding for a new company. In addition to funding,
another advantage of obtaining angel capital is that entrepreneurs can greatly benefit
from the managerial expertise of the angel investor.