Angel investments offer much more flexible monetary terms than standard financing, and the arrangements of angel investments can extend beyond merely monetary. Here’s how experienced investor Steph Korey has seen angel investments structured.
Angel Investors’ Expected Returns
Angel investors recognize that each investment they make in an early-stage startup is a long shot, so they look for high potential returns. They generally don’t want just a benchmark 10-percent annual return, but eventually, want to grow their investment by 5 to 10 times what they initially put in. Not every investment will work out — so those that do must have huge potential.
Because angel investors want such big returns, they generally look for companies with low to moderate valuations. Steph Korey suggests valuations of $4 million or less, although this isn’t a strict figure. Some investors may consider higher valuations if a business is truly disruptive.
Valuation is a standard part of angel investment negotiations. Business owners should be prepared to discuss both pre-investment and post-investment valuations.
Monetary Investment Arrangements
The returns that angel investors seek can be structured in many different ways. Any of the following options may be used according to Steph Korey, and they can also be used in conjunction with one another.
The most common arrangement is to grant the investor part ownership in the business. The amount of ownership is commensurate with the investment and business valuation. Business owners should carefully consider an investment before giving away a controlling share, and they ought to be prepared for more dilution in later rounds of funding.
Sometimes angel investors offer convertible notes, which are loans that let investors convert the note into part ownership at a later date. Future ownership grants them access to a business’s potential, while the loan payments provide protection against loss.
Occasionally investors offer standard loans. Loans are pegged to market interest rates, although they’re usually slightly higher than what a bank would offer.
Intangible Promised Benefits
In addition to angel investors’ financial investments, they often also offer business knowledge and/or access to their connections.
The business knowledge that an investor has can help a company grow at an accelerated rate. If formalized, the knowledge may be offered through mentorship, an advisory role and/or voting rights via ownership or a board seat. Business owners should clarify how much of an investor’s time they’ll have access to if mentorship is a major reason to partner with a specific investor.
An investor’s connections can grant business owners access to sales opportunities or lower-priced services than they would otherwise have. These are implied in many angel investment arrangements, but they also can be formalized. If an investor is offering a specific action that they’ll do, that should be noted in an agreement.
Steph Korey Has Structured Multiple Angel Investments
Steph Korey has herself structured multiple angel investments. In each one, she looks for an arrangement that benefits both herself and the business owner.