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How Does Angel Investing Work?

2 min read

Sep 27, 2022 9:52:09 AM | Assure

Newer companies typically don't have the funds and capital to take their great idea to market in a way that works. After all, it's incredibly expensive to launch a company.

You'll need a place to do business, people to help you grow and expand, and all the tools and tech to help make it all possible. Even tech companies that intend to work primarily online have significant startup costs with huge payrolls to cover and licenses to buy, and most new businesses will reach a point where their aspirations come up against their financial abilities.

Enter the angel investor. Angel investing allows growing companies to get the capital they need to expand without all the red tape of traditional loans or even the mandate of turning a profit.

If you're wondering how angel investing works, it's because of the money and timelines involved. Angel investors have access to tons of liquid capital, and they'd rather get in on the ground floor of a great idea by infusing a company with money in exchange for ownership or company stock. That makes angel investors less interested in turning a paltry profit in a year or two -- instead, they're looking for that company to go big and go public, helping to turn their investment into a bonafide fortune.

What Is an Angel Investor?

High-net-worth individuals and those that have excess capital to spend often become angel investors because of the upside of angel investing. By infusing companies with up to 90 percent of the capital that they need to grow, angel investors are what make the idea of modern-day startups possible. Entrepreneurs may have great ideas, but they need the cash to help turn those ideas into reality, and that means working with angel investors.

In fact, some angel investors may be accomplished entrepreneurs in their own right, and after seeing how angel investing works first-hand, they've decided to give it a shot with funds from their own success story. Even if they don't have experience in running companies themselves, they're often plugged into more general market trends, and that gives them the expertise to pick who they believe will be winners in the future, allowing them to get in early today. 

Their guidance, capital and networking can be a great boon to a growing company, and many angel investors may actually want a seat on the board or to assume a role at the company after investing.

How Angel Investing Works

As a form of private equity investing, angel investing is a high-risk, high-reward type of investing that can help bring on huge windfalls for those that may want something better than what they can obtain with traditional investment opportunities. It's not a guarantee, and the money doesn't need to be paid back, and that's why growing companies often opt for the power of angel investing -- because if it doesn't work out, they won't owe those millions of dollars to a bank or other financial institution.

When angel investors get involved, the companies they support may not turn a profit for years. But that's not an issue for angel investors that have a long-term approach to their investments. If a given company blows up or goes public, that can mean a huge payoff that can exceed their original investment many times over. This is also an exciting part of how angel investing works -- angel investors like picking winners and getting in on the ground floor of the next big thing, and that wouldn't be possible with the terms of typical loans.

How Much Do Angel Investors Invest?

While there's no minimum -- or maximum -- amount that an angel investor must invest to qualify, angel investors can get started with just $5,000 if they want to invest in people and ideas that are at the nascent stages. However, for companies with a few years under their belts, it could take millions to become an angel investor, and the agreed-upon investment amount is merely part of the transaction.

How Do Angel Investors Get Paid?

Unlike typical loans that must be paid back in full, plus interest, by the expiration date, angel investors don't earn interest on their investments at all. That's because in exchange for their capital, angel investors negotiate an ownership stake in the company, which can range from a controlling interest to simple shares of company stock. If the company never hits it big or goes public, the angel investor will make nothing and will lose the entirety of their investment. However, if the company takes off, an angel investor can stand to make a tidy sum in exchange for their investment.

Becoming an Angel Investor

Those with excess funds that want to try their hand at angel investing will need to know how angel investing works. Beyond identifying a company and negotiating ownership, they must also be an accredited investor, which means that their earned income must exceed $200,000 (or $300,000 if married). It's also possible to become an angel investor with a net worth that exceeds $1 million in value.

If you're interested in seeing how angel investing can help take your company or idea to the next level, Assure can help. Our Glassboard product makes SPV administration easy. Contact us today to get started.