Angel investors specialize in providing financial backing for small-business owners and entrepreneurs during the startup phase and beyond. Some pros and cons of angel investors are below.
Pro: Angel Investors Are Willing to Take Risks
Angel investors are often established entrepreneurs who understand the degree of risk involved with establishing a small business.
Con: Angel Investors May Set the Bar Higher
An angel investor’s higher risk tolerance may come with higher expectations. They’re in business to make money, and when there’s a substantial amount of capital on the line, they’re going to want to see the payoff. It’s not unusual for angel investors to expect a rate of return equaling 10 times their initial investment within the first five to seven years. The pressure to deliver can be intense.
Pro: The Money Isn’t a Loan
When you take out a small-business loan, the bank expects you to pay it back, regardless of whether your venture actually succeeds. Angel investors operate within a different framework. They provide you with the money you need to get going and, in exchange, they get an ownership stake in the business. If your startup takes off, then you both reap the rewards financially. If the business fails, the angel investor doesn’t get paid back.
Con: There Are Strings Attached
Even though you’re not technically obligated to repay the investor the money they chip in, there’s a catch. When you hand over equity in your company as part of the deal, you’re essentially giving away part of your future net earnings. The percentage of ownership an angel investor asks for typically depends on how much they’re investing. If you expect your business to be wildly successful, it could add up to a lot of money you won’t be able to lay claim to. When you’ve got an offer on the table, review the terms carefully to make sure the amount of ownership the investor is requesting doesn’t infringe on your own ability to realize a profit.
Pro: Your Odds of Success Increase
Typically, angel investors bring years of experience to the table and they already know the ropes when it comes to starting a company. If you’re seeking advice and guidance in addition to funding, an angel investor may offer a wealth of valuable knowledge.
Con: You’re Not in Total Control
Angel investors often expect to take an active role in making decisions that affect the outcome of your business. Even if they leave the reins in your hands, you may be accountable for explaining the reasoning behind your choices.