Angel investors are qualified individuals or entities who provide seed money to invest in promising small and startup businesses. They are typically offered a stake in the business in exchange for their financial assistance and are a source of alternative financing for new businesses with limited resources.If you think that angel funding might be a good fit for you, we’ve compiled some pros and cons of angel investors for your consideration.
| Pros | Cons |
|---|---|
| Targeted toward small and startup businesses | Vague terms and funding timeline |
| No monthly payment commitment due to equity stakes | Option of debt to equity conversion required |
| Support from credible and knowledgeable investors | Unsolicited business advice |
| Networking opportunities available | Swift business growth is expected |
| Future financing opportunities | Accessibility can be based on who you know |
| Less rigorous qualification requirements | Large ownership percentage can be requested |
| Available to business of all industries and locations | Eligibility and verification process can be lengthy |
Equity stake refers to the ownership percentage an investor has within a business. This is usually accommodated by a convertible note, which is the financial agreement between the investor and your business.
Pros of Angel Investors Explained
Angel investors can be a good alternative funding source for businesses seeking financing instead of getting a small business loan. Here are a few advantages as to how raising angel funding can benefit your business.
1. Targeted Toward Small & Startup Businesses
Angel investors target new businesses in particular to gain ownership stakes in up-and-coming companies. Instead of seeking a traditional business loan, business owners can trade equity stakes to get backing from investors. This is a common financing source that provides flexible funding opportunities, especially to companies with limited capital and resources.
2. No Monthly Payment Commitment
Unlike a standard loan, there’s no monthly payment obligation; instead, the investor has an equity stake in the business. If you don’t currently have the budget to facilitate a startup business loan, offering ownership stakes in exchange for seed money can alleviate the pressure of having to pay back a large lump sum of funds over time. This allows for more flexible cash flow, which can be beneficial in the early stages of a startup.
3. Support From Credible & Knowledgeable Investors
Chances are that the angel investors you’re working with have first-hand, entrepreneurial experience and can support your business by offering advice on achieving success in your long-term goals. Leaning on your investors for insight into smart business decisions can very well be what helps your business grow and become successful.
4. Networking Opportunities Available
Angel investors often work in groups and can introduce you to a network of investors who may be interested in doing business with you. They can also direct you to new customers, other industry contacts, and potential business partners, all of which can lead to further opportunities and promote growth of your business.
5. Future Financing Opportunities
If an angel investor partakes in funding your business, it’s likely that they will want to see a positive return and be motivated to promote further financing opportunities later on for your business to succeed.
6. Less Rigorous Qualification Requirements
Potential is the key consideration for angel investors in vetting your business, which contrasts with obtaining financing from a bank or other lending institution that relies on creditworthiness. You won’t have a specific set of criteria to adhere to when seeking out an angel investor. While you should still plan on presenting your business plan and financials, the formality of qualifying is typically less rigorous.
7. Available to All Business Types
Angel investors often come from vast backgrounds of various industries nationwide, so no matter what industry or location your business is in, there’s likely someone interested in your product or service. If they see potential in your business and have experience in a similar venture, it helps mitigate high risk to the investor.
Cons of Angel Investors Explained
As with any type of financing opportunity, you should know any potential disadvantages or risks involved. Here are some drawbacks consider in determining if using an angel investor is a good fit for your business.
1. Vague Terms & Funding Timeline
Defining the terms of an agreement can be an ambiguous process, considering the less formal structure of working with angel investors. Whereas a loan agreement issued by a lending institution may have clearer terms and disbursem*nt times, there are variables in drafting an agreement with an investor that can lead to numerous negotiations and stipulations before completion.
2. Option of Debt to Equity Conversion Required
The option to convert debt into equity is a requirement offered to angel investors as a term of their investment. This can reduce your overall ownership percentage and involvement in the business since you’re relinquishing equity in return for funding.
3. Unsolicited Business Advice
When sourcing funds outside of traditional financing, you’re probably approaching investors whom you’re close to or who have prior experience. With this, you may come across unsolicited advice on how to run your business. While this can sometimes be helpful, don’t be surprised if everyone wants to offer their two cents—whether you ask for it or not.
4. Swift Business Growth Is Expected
Investors will anticipate quick growth of your business to fulfill their return on investment. This may come with high expectations that put pressure on the performance of your business and could potentially impact the goals and operations you’ve established thus far.
5. Accessibility Can Be Based on Who You Know
Getting to know some angel investors requires a bit of research. If you don’t have the advantage of knowing any personally, you’ll have to seek out another business or platform that can connect you―which can be a tough endeavor since you need to establish trust and credibility. Building a connection can be time-consuming and may even lead to a dead-end effort. Even more so, since supporting a startup can come with quite a bit of risk, some investors may favor more established companies that already have a history of success in other business ventures.
6. Large Ownership Percentage Can Be Requested
Some angel investors may request an ownership percentage larger than you accounted for and may desire to be heavily involved. If you’re continually growing and seeking funding from more than one investor, you may be left with limited control of the business over time.
7. Eligibility & Verification Process Can Be Lengthy
Due diligence of angel investors can mean a lengthy process of verifying the credibility of your business. Their qualification guidelines differ from that of a traditional lending institution, which usually require criteria such as time in business, credit history, or collateral requirements.
Each investor will define their own requirements and, in doing their research, they may take their time to ensure you’re worthy of their investment. Even then, you may be subject to rejection and have to move on to another opportunity, which can be time-consuming and troublesome if you need immediate funding.
If you think angel funding is right for you and are ready to get started, see our guide on how to get angel funding.
Frequently Asked Questions (FAQs)
No. Angel investors typically seek an equity stake in a business rather than repayment of the funds they provide.
Unless agreed upon otherwise, you can typically use the funds in any capacity that supports getting your business up and running.
It can be difficult finding a seasoned investor if you don’t already have a personal connection with one. You can start by attending networking events or utilizing online angel investor directories.
Bottom Line
Many factors should be taken into consideration when working with angel investors. They can be advantageous to your business if you need flexible financing or are currently unable to obtain other funding sources.
Be sure to note the potential disadvantages, such as company control and growth expectations. When weighing your options, reference our angel investors’ pros and cons and decide what’s best for you to achieve your business goals.
