Last year, we shared a post about the difference between venture capitalists and angel investors and what both parties can do to benefit small businesses in need of funding. For a fledgling startup, it might initially seem as though there are only upsides to getting investors interested in your business — after all, it’s extra money that you could really use! However, there are still a few areas of the process to watch out before saying yes to the investment. Here’s a shortlist of the pros and cons to keep in mind when getting started.
Pro: You’ll have more money
Let’s bring everyone up to speed on what it is an angel investor does first. Angel investors take their existing wealth and invest a chunk of it into your business. In return, they only request a piece of equity in your startup. These investors are all around us — doctors, lawyers, and even existing entrepreneurs can all be considered angel investors. However, unlike venture capitalists, they don’t have millions to financially cushion your company with. A typical angel investment varies at $25,000 to $100,000 per startup.
If an angel investor believes in your business and its offerings, they’re willing to take a leap of faith for you and invest in it. Now, you’ll have more money to put towards your company and various initiatives to help it grow like hiring new employees. This type of money is not a loan, so you’ll never have to worry about repaying it back, but before anyone invests…
Pro: Attracting angel investors means you’ve (probably) got a great idea
Angel investors are naturally drawn to entrepreneurs that are passionate about their companies, but even more so to the ones that understand how it can succeed over time. Before they invest, they will want to see your business plan to make sure you’re on the right track. (After all, once they put some capital into it, this is a track they’ll be on too!) Here’s your chance to draft up a business plan, elevator pitch, and executive summary that views your business and how it fits into the market as critically and objectively as possible.
Con: The business will no longer be 100% yours
For some entrepreneurs, this might not even be much of a con. If you don’t mind having others take charge, stepping back to allow an angel investor to step up and take control isn’t an issue. Other small business owners might not be so on board with having an outside party take over though. As advised by QuickBooks, if you’re not ready to let go try to find an angel investor you know or who understands your business first. Talk to them about the process and ask any questions you may have before investing. This will give you a chance to find out if you’re okay with having someone else run the startup too or if it’s a better idea for you to keep your freedom as a solopreneur.
Con: You might wind up having less money
Remember when I said earlier that all angel investors want in return for investing their capital in your business is a piece of equity? Because your startup is so new to the world, the risk of success and/or failure is higher, leading to investors taking a bigger slice in the pie. These equity percentages can start at 10% or more — and that’s a lot for a new company! Be sure to discuss in advance the expectations that angel investors have with your business and whether or not you’ll be able to meet them at what they’re looking for.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.