Different funding opportunities
exist for people who are seeking startup capital. These funding opportunities can
range from taking out a small business loan from the local bank to borrowing money
from relatives and friends. Another option to obtain necessary startup funding is
through an angel investor. With several different funding opportunities available,
it is important to understand the ramifications of each loan in your business pursuit.
Angel investors and equity financing
Often times, when a prospective entrepreneur exhausts all of their immediate funding
sources (personal savings, borrowed money from friends and family, and bank loans),
they turn to angel investors to raise
capital. Angel investors will provide the amount of needed funding to the
entrepreneur in return for equity capital. This means that the new business will
be funded in exchange for ownership interest in a company. This interest usually
comes in the form of stocks or some other form of ownership that converts to stock.
Unlike traditional debt financing that requires immediate payment over time, equity
financing does not involve repayment of the borrowed money since angel investors
desire equity ownership stake.
Angel investors and their exit strategy
Before investing in a business,
an angel investor will expect an exit plan, the agreeable strategy by which they
will cease their ownership in a company. This can come in the form of an acquisition,
initial public offering, earn-out, merger, or debt-equity swap. Angel investors
who hold equity ownership in a company will often prefer to sell their shares in
an IPO (or initial public offering), while others may prefer the sale or merger
of the company.
Angel investors and experience
When angel investors invest in a company, they usually request a seat on the Board
of Directors and/or take an active management role in running the company. This
can be perceived as both good and bad. It is good in the sense that often times
experienced angel investors will provide valuable insight to the
entrepreneur, mentoring
them throughout the venture in order to ensure the invested companyâs success. However,
there is a downside to giving up a certain percentage of ownership to an angel investor.
The more ownership that the entrepreneur gives up, the more overall control they
lose.
Angel investor capital requirements
In order for an entrepreneur to obtain startup capital from an
angel investor, they
will need to devise a well-written business plan, present accurate cash flow projections,
the financial history, and personal and business credit profiles. Some angel investors
may request the latest tax return information and bank statements from the past
three years. It is necessary to present a well-detailed business plan and have confidence
in the plan so that you can convince the lender that you are a low-risk investment
when obtaining startup capital. If the
entrepreneur appears confident and has good
business sense, then they will most likely have no problem in finding their desired
startup capital for their business.
Conclusion
Equity financing is a type of loan in which angel investors invest in a business
in return for an ownership percentage in the company. They bring to their invested
company solid experience with the ultimate goal of lucrative returns since they
actively mentor and give advice to the new entrepreneur. The new business owner
has to have a great business idea
with the prospect of a high return on investment in order for an angel investor
to consider an investment. The entrepreneur has to also be impressive in their pitch
and business plan.