In our article on SAFEs vs Convertible Notes, we referenced the “friends and family” rounds as the most common way founders first raise money. At this stage, individuals are primarily writing checks because they love and trust you, and little to do with your business idea or any expectation of actually making money. Every penny from this precious purse must be spent wisely to build the business.
But what happens if you need more money to reach your goals, but you have already exhausted funding opportunities from your friends and family? Perhaps you have built a minimal viable product, but the company is still pre-revenue, and therefore not quite ready for investment from a venture capitalist. Who are the people willing to invest at this stage? No, not the Avengers. What you need, my friend, is an angel investor.
The term “angel investor” is broad, but the simplest definition of an angel is an early-stage investor in a startup. Common among angels is that they invest at a stage of funding called “seed” or “pre-seed,” which typically comes after a “friends and family” round. Unlike the venture capitalist model in which money is first pooled into a “fund” which is then invested by the fund’s managers into various companies, angels typically source their investment capital from their own personal wealth. However, it is not uncommon for angels to band together and collectively invest in early-stage companies to mitigate risk through diversification.
Angels typically fall into one of two categories. The first category of angels is wealthy individuals with excess funds and a high level of risk tolerance seeking a high return. These angels may lack the technical or industry experience to conduct extensive diligence and are more willing to write a check on the advice of others and then assume a passive role going forward.
Angels in the second category will normally limit their investments to companies aligned with industries or technical areas in which the angel has deep experience and/or a network of professionals who do. From diligence onward, these angels behave much more like venture capitalists in that they are not only willing to provide guidance and introductions, but they also have an expectation of oversight, transparency, and communication with respect the company’s progress.
Understandably, in return for providing critical capital and advice at such an early stage, angels will demand corresponding favorable terms. Although not uniformly true, most angels will be amenable to investing through a convertible instrument such as a simple agreement for future equity (“SAFE”) and a convertible promissory note. Please see Charlie’s article for a discussion of the differences between the two. If you are successful in obtaining funding from angels, congratulations, you are one step closer to your next goal, which is using the new influx of cash to push your venture far enough along to withstand the scrutiny of venture capital investors.
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