Getting your small business up and running without much money can be a daunting task. But an angel investor could be the answer, providing the funds you need to successfully launch your startup.
Definition of an angel investor
An angel investor is someone who invests their own money in a business at an early stage in return for a minority stake.
Investors are often entrepreneurs themselves with plenty of business experience and who are looking to invest in a new venture which shows promise. Potential investors could also be business professionals or C-level company executives who know what it’s like to run a business at a high level.
Angel investment is about more than just funding – business angels bring with them a wealth of experience which can be invaluable for a startup. From business advice to useful contacts, mentorship and referrals, angel investors can offer small businesses the benefit of their knowledge and expertise.
Angel investor syndicates
An angel investor can invest alone but typically they will make their investment as part of an angel syndicate. This is when a group of business angels work together, pooling money and resources, to find potential investments.
What does an angel investor do?
A business angel will invest money in return for equity. They may also be quite hands on, offering advice and spending lots of time with the new entrepreneur to make the business successful.
They will offer their expertise and help the startup achieve its aims
They may act as a mentor providing strategic advice on how best to use the funding, helping with business plans and optimising the investment
Angel investment can help give your business credibility for future rounds of investment as things develop
Are there any risks with angel investment?
With any business venture there are no guarantees, and even with funding in place and the benefit of a seasoned entrepreneur’s experience, your small business could still fail. Investing is a risky business for both the angel and startup and beyond the financial risk you could also disagree with your investor and find the deal falls apart.
Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
Angel investors get generous tax breaks through both the EIS and SEIS which reduces the risk for them and incentivises investment. But they also stop investors from taking more than 30% of the business they invest in to keep small business owners incentivised too.
Financial Services and Markets Act 2000 (FSMA)
The FSMA gives some protection to startups with an investor being required to self-certify as a sophisticated investor or a high net worth individual who has the capability to receive and understand a business plan and to invest in businesses.
Frequently asked questions about angel investors
What is angel vs venture funding?
Angel investors tend to be individuals or small syndicates who specialise in early-stage businesses or startups. Venture capital typically involves an entire venture company which takes a lot longer and a lot more due diligence to secure. They are usually looking for established businesses with high growth potential.
How do angel investors make money?
An investor will provide funds in exchange for a share of your company equity in the expectation they will receive returns if the company makes money.
What percentage do angel investors get?
The amount of equity they hold will vary from deal to deal but typically they will ask for anything between 10% and 25% on average.