Start-up businesses that are unable to receive traditional financing may be able to look to angel investors to provide much-needed capital for expansion projects. These investors, usually wealthy individuals or firms, invest money into small businesses and start-up firms with ambitious expansion plans and high growth prospects.
Unlike with most types of small business funding, angel investors do not charge interest and do not require companies to pay back the amount of money they receive for start-up or expansion. However, this does not mean that such investors provide free money for business expansion. Instead, in exchange for providing financial assistance, angel investors take stakes of "equity," or ownership, in the companies in which they invest.
In exchange for providing financial assistance, the average angel investor claims a 23 percent equity stake in a business, according to a 2011 article from Gary M. Stern, a columnist for Small Business Review, an online magazine aimed at providing information for company owners. This means that -- on average -- a small business owner looking to finance expansion with angel investor money must give up 23 percent of her business, as well as an equal amount of the profits her company earns.
Although the average equity stake for angel investors is 23 percent, these entities may sometimes ask for as little as 10 percent or as much as over 50 percent share of ownership in the businesses that they finance. In most cases, the share of equity an angel investor takes is directly related to both a business' monetary value and the amount of funding it needs in financing. Companies with high financial needs and low monetary values should expect to give up more than the average amount of equity in their businesses to angel investors.
Effects and Considerations
Because angel investors have equity in the companies in which they fund, they are entitled to a share of the business' profits. Due to their partial owner status, angel investors also have a degree of influence over companies' policies, hiring plans and expansion projects, although primary business owners retain the right to make most day-to-day decisions on company operations. Additionally, applying for funding from angel investors is typically not free. As of the time of this publication, most angel investment individuals and firms charge businesses application fees ranging from $100 to more than $2,000, according to the Small Business Review article.
- Entrepreneur: A Guide to Angel Investors
- Corporate Finance Institute. "Angel Investor." Accessed July 26, 2020.
- U.S. Securities & Exchange Commission. "Updated Investor Bulletin: Accredited Investors." Accessed July 26, 2020.
- Angel Resource Institute. "2016 Angel Returns Study." Accessed July 26, 2020.
Elias Westnedge began writing in 2009. His work appears on various websites, covering aviation, sales, grants, business and consumer finance. Westnedge holds a Bachelor of Science in aviation.