angel investorIn order to create a startup business, entrepreneurs need money. There are many different types of investors that provide capital for small businesses. Angel investors are one such type.

Knowing what an angel investor is as well as the advantages and disadvantages of angel investing can help entrepreneurs decide whether or not an angel investor is right for their startup business.

What Is An Angel Investor?

An angel investor is a person who invests in business startups and growing businesses. Angel investors expect a higher rate of return than traditional investors. In fact, many angel investors look for a return of 25 percent or higher.

Angel investment is a type of equity financing, which means that the angel investor expects shares in the business in exchange for the money provided. For a business that is still small and relatively unestablished, or for a business that has yet to be established, equity financing is often easier to secure than a small business loan.

Who Can Be An Angel Investor?

Often, angel investors are relatives. Many people feel more comfortable asking family for money, and often find it easier to secure investment through family. However, there are some disadvantages to securing angel investment through family members. When businesses fail, the disappointment and loss of money can have a negative impact on familial relationships. Angel investment from family members works best when family relationships are strong and families trust one another.

Angel investors can also be wealthy people who are seeking a business to invest in. Sometimes these wealthy people are personal acquaintances or friends, other times angel investors are found by word of mouth and through community connections. Sometimes angel investors take the form of a group of people who pool their money and invest in the company.

Benefits of Angel Investment

Angel investment is less risky than traditional debt financing. In fact, if the business fails, angel investors do not have to be paid back. Angel investors invest in businesses because they have an interest in securing a share in a long-term business venture. They do not expect to be paid back immediately because they expect to get their money back in time, as the business thrives.

Disadvantages of Angel Investment

For many business owners, one of the most obvious disadvantages of angel investment is the partial loss of control over the future of the business. Angel investors have a share and a say in the future of the business, and usually expect to exercise that right. For this reason, it’s important to match the right angel investor to the right business owner. Business owners and angel investors should have similar ideas about the future of the business, and how the business should be run. Angel investors also receive a portion of the profits if the business is ever sold.

Establish a Healthy Business Relationship

The best way to ensure success between an angel investor and an entrepreneur is to establish a healthy business relationship. Communication is key. Before finalizing the investment, the angel investor and the entrepreneur must come to an agreement about the investor’s role in the business and the future of the business itself.

It’s important for the entrepreneur to have a business plan in place before these discussions begin, so the angel investor can understand the direction that the business is going. Talking out these issues can help the angel investor and the business person decide if the relationship is right for them.