FAQs on Angel Investing
An angel is a high net-worth individual who invests his or her own money in start-up companies in exchange for an equity share of the businesses. ACA recommends that entrepreneurs work with investors who are accredited investors (who meet requirements of the Securities and Exchange Commission) and who can add value to the company via high quality mentoring and advice. Other important things to know about angels include:
In an angel group, individual angels join with other angels to invest collectively in entrepreneurial firms. Angel organizations come in many forms, but all have certain characteristics:
Other points of interest about angel groups are:
While both invest in entrepreneurial firms and take equity (ownership) in those businesses, there are some important differences:
Angel investment is the right source of funding for only a small proportion of entrepreneurial businesses. When considering yourself for investment by an individual angel or angel group, ask yourself these key questions:
In general, the best time to seek angel funding is when:
No two groups are exactly alike, but generally groups expect to at least see the following:
Angel groups follow several stages of review in order to make funding decisions. Below is a listing of these steps. It is important to recognize that groups may conduct these steps in a different order than is presented here.
Will angel groups sign non-disclosure agreements? If they don't, how do entrepreneurs protect confidentiality?
During the initial portions of the evaluation process, the vast majority of angel organizations will not sign non-disclosure agreements. Angel groups just see too many deals, often in a similar space. When submitting executive summaries and even business plans, the entrepreneur needs to explain the business so that the potential investors can understand the company's opportunity for success, but don't learn about any confidential issues. If you have intellectual property that has not been patented, it is best not to disclose it to the angel group when you are first submitting your company for investment. Remember that angel groups are most interested in the business behind the technology or idea they don't invest in the inventions but in the business models and management teams that will grow the companies. If your company makes it through to final due diligence, the angel group may need to research intellectual property issues and then would sign non-disclosure agreements at that time.
Should I expect to pay fees to participate in the screening process or to present to an angel group?
In 2008, ACA recommended that angel groups charge entrepreneurs no more than nominal fees for applying for and/or making presentations for angel capital and that all fees are fully disclosed, ideally appearing on the group's Web site. The fees should be no more than a few hundred dollars for applications and no more than $500 for presentations. Transparency to entrepreneurs is of utmost importance, so full information about fee amounts and what the fees are for should be included on the groups home page and/or other prominent portions of the site and other important promotional materials. Angel groups should also provide a consistent program of high quality coaching, preparation and feedback to entrepreneurs participating in screening and presentation activities.
These guidelines match the practices of the great majority of ACA member groups, based on a 2008 survey. About than two-thirds of responding members charge no application or presentation fees, and the other third mostly charged nominal fees. The survey results are listed below. ACA will also pursue developing a database on member group investment practices, including fees, on our Web site to search and review by entrepreneurial ventures. ACA is an inclusive association that welcomes membership from any angel organization meeting the application criteria, but it does not endorse the practices of any group that levies large fees and/or does not forthrightly explain its potential fees to the entrepreneurial community.
Summary of Survey Responses on Charging Fees to Entrepreneurs