FAQs About Angel Investors
What is an angel investor?An angel is a high net-worth individual who invests his or her own money in start-up companies in exchange for an equity share of the businesses. ACA recommends that entrepreneurs work with investors who are accredited investors (who meet requirements of the Securities and Exchange Commission) and who can add value to the company via high quality mentoring and advice. Other important things to know about angels include:
How many angel investors are there in the U.S.? The best available estimates are that about 300,000 people have made an angel investment in the last two years. Many more people could become angels based on a net worth of $1 million or more, the potential number of angel investors is 4 million. Yes. The only academic study of American angel investments found that angels lose some or all of their money in 52 percent of their investment deals because the companies go out of business. The most sophisticated angels make at least ten investments in order to make a return on their investment, counting on one or two to provide nearly all of their return. How do angels help small businesses? In addition to financial capital, top angels mentor and coach their portfolio companies, often leading to more healthy growth. They introduce entrepreneurs to potential customers and investors, see around potential problem areas, and help the start-up firms gain credibility in their fields. According to the Angel Capital Association, angels will aggressively strive to invest their capital in innovative companies with the potential to grow to hundreds of employees and $50 million in sales within three to seven years of start up. Such companies command the highest level of interest from angels and the associated demand often results in short windows of opportunity when a funding round opens up. What are angel groups?Individual angels are joining together with other angels to evaluate and invest in entrepreneurial ventures. The angels can pool their capital to make larger investments. ACA has more than 400 angel groups in its database and many more across the globe.Angel organizations come in many forms, but all have certain characteristics:
Other points of interest and important statistics about angel groups are:
Why are angel groups important? Angel groups are generally easier for entrepreneurs to find and often become the central connector of deals in their communities, include some of the most sophisticated and active angel investors in the country, have been recognized for job creation and generation of additional venture capital for companies, and are a leading indicator of angel investor activity. How do I find an angel group?
How do I start an angel group?ACA provides access to resources to start exploring your options to start an angel group in your community. What is an Established Angel Group?With the introduction of the SEC rules for generally solicited offerings (also known as 506(c) deals)and particularly the need for issuers to take "reasonable steps to verify" that all of their investors are accredited, ACA has developed an easy and sensible verification method for all angel groups and their members. The goal of the Established Angel Group annual certification program is to remove the need for angels to provide documentation of their wealth or income to entrepreneurs or third parties for 506(c) deals. Instead, angel investors will verify their accredited status by being a member of an Established Angel Group (EAG) that meets the criteria of this program. What is the difference between angels and venture capitalists?While both invest in entrepreneurial firms and take equity (ownership) in those businesses, there are some important differences:
What kind of companies do angels invest in?Angels look for new innovative companies that can grow quickly in sales and value (creating jobs along the way). Examples of angel-backed businesses include Google, Yahoo, Amazon, Starbucks, Facebook, Costco, and PayPal. How do I know my business is right for an angel group investment?Angel investment is the right source of funding for only a small proportion of entrepreneurial businesses. When considering yourself for investment by an individual angel or angel group, ask yourself these key questions:
When should I approach an angel group?In general, the best time to seek angel funding is when:
What criteria do angel groups use to select entrepreneurs?No two groups are exactly alike, but generally groups expect to at least see the following:
What process can I expect if I apply to an angel group for funding?Angel groups follow several stages of review in order to make funding decisions. Below is a listing of these steps. It is important to recognize that groups may conduct these steps in a different order than is presented here.
What kinds of term sheets and legal documents do angels use? Sophisticated angels, working with their attorneys, use a series of legal agreements to govern their relationships with the companies they invest in. A starting point is the model legal documents developed for the National Venture Capital Association by a committee of attorneys across the country. For those looking for simpler documents, see the Angel Term Sheet developed by the Alliance of Angels. Other standard documents are included in this article. Will angel groups sign non-disclosure agreements? If they don't, how do entrepreneurs protect confidentiality?During the initial portions of the evaluation process, the vast majority of angel organizations will not sign non-disclosure agreements (NDAs for short). Angel groups just see too many deals, often in a similar space. When submitting executive summaries and even business plans, the entrepreneur needs to explain the business so that the potential investors can understand the company's opportunity for success, but don't learn about any confidential issues. If you have intellectual property that has not been patented, it is best not to disclose it to the angel group when you are first submitting your company for investment. Remember that angel groups are most interested in the business behind the technology or idea they don't invest in the inventions but in the business models and management teams that will grow the companies. If your company makes it through to final due diligence, the angel group may need to research intellectual property issues and then would sign non-disclosure agreements at that time. Should I expect to pay fees to participate in the screening process or to present to an angel group?These guidelines match the practices of the great majority of ACA member groups, based onsurveys in 2008 and 2013. About two-thirds of responding members charge no application or presentation fees, and the other third mostly charged nominal fees. The survey results are listed below. ACA will also pursue developing a database on member group investment practices, including fees, on our Web site to search and review by entrepreneurial ventures. ACA recommends that angel groups charge entrepreneurs no more than nominal fees for applying for and/or making presentations for angel capital and that all fees are fully disclosed upfront, ideally appearing on the group's Web site.The fees should be no more than a few hundred dollars for applications and no more than $500 for presentations. Transparency to entrepreneurs is of utmost importance, so full information about fee amounts and what the fees are for should be included on the group's home page and/or other prominent portions of the site and other important promotional materials. Angel groups should also provide a consistent program of high quality coaching, preparation and feedback to entrepreneurs participating in screening and presentation activities. ACA is an inclusive association that welcomes membership from any angel organization meeting the application criteria, but it does not endorse the practices of any group that levies large fees and/or does not forthrightly explain its potential fees to the entrepreneurial community. These guidelines were reaffirmed by the board in late 2009. They match the practices of the great majority of ACA member groups, based on a 2008 survey and updated with another survey in 2013. More than two-thirds of responding members charge no application or presentation fees, and the other third mostly charged nominal fees. The 2013 survey results are listed below. It is interesting to note that the percentage of angel groups that do not charge fees to startups is essentially the same in 2013 as 2008, but that the median fee amounts have decreased by 20% for applications and 31% for presentations. Summary of Survey Responses on Charging Fees to Entrepreneurs October 13, 2013Total survey responses - 107 Yes - 35(32.7%) If you charge, at what stage and how much? Application Fee- 19groups charge Presentation Fee- 15groups charge Are there other information sources? More information is available via www.angelcapitalassociation.org. ACA is the professional alliance of angel groups in North America and has 13,000accredited angel investors as members. You may also take advantage of the following resources:
Information about webinar access for ACA members and all other attendees can be found here. Web sites & Other Sources:
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FAQs | ACA (2024)
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