The Risks of Angel Investors

It should be noted that there are many risks associated with selling a portion of your business to a third party angel investor if you need to raise equity capital. Business angels are those inclined to bankroll entrepreneurs if they feel that they can generate a very high return on their investment. When you are thinking about raising capital from a private investor then you should give substantial thought as to what you will provide them in exchange for their equity investment. Within your business plan, you should always provide a funding source was a complete understanding of how you intend to use these funds as this going to be needed by either a private investor or bank funding source as it relates to your capital needs. Equity financing is usually far more expensive than debt capital, and you should examine alternatives before pursuing angel investors or venture capital firms.

Venture capital firms typically want 80% of your business, and angel investors will want a controlling interest in your business. Tangible property is not interesting to angel investors, and you should only use equity capital for risk purposes. However, and again, a lawyer should always be involved with this process if you are seeking capital from a private funding source. We always recommend that you work closely with a CPA when you’re going through this process as it is complicated and you will need a substantial amount of advice. It is very important that you have an extensive amount of industry experience as it relates to the business that you intend to start or expand as you, your angel investor, or your private funding source is going to want to see that you are able to bring the operations of your business to profitability quickly.


Private funding sources usually want to sit on your board of directors as it relates to providing oversight for their investment. Loans that are provided by individual investors typically do not require the borrower can provide a personal guarantee although the business may need to hypothecate certain assets if you are seeking this type of financing. Private funding sources usually do not provide loans as we have discussed in many of our previous articles. Typically, angel investors do not work with business owners and businesses that do not have that much experience. When you’re working with outside equity funding source, you should thoroughly present a plan that allows the investor to cash out their equity at specific milestones so that an investor can recoup their investment plus a profit.

Venture capital is only reserved for large scale businesses, and unless you need more than $5 million in funding then you should work with an angel investor or SBIC. For real estate investments, you may want to seek a hard money lender instead of seeking equity funding. Your local bank may be able to provide you with some level of equity in addition to a loan if they maintain connections with private investors. You may be required to have a private placement memorandum if you are seeking capital from accredited investors or individual investors.


Angel Investor List [] Download. No registration required! Includes Free Business Plan Template.


Looking For Angel Investors [] is a website dedicated to people finding private investment.


Matthew Deutsch is a prominent business plan writer. His work has been included in nine books pertaining to this subject. Additionally, Mr. Deutsch has written extensively on subjects regarding entrepreneurship, small business lending, angel investing, and other related topics.


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