What Is an Angel Investor? Definition and Guide

what is an angel investor

An angel investor is a wealthy individual who provides funding for a startup, often in exchange for an ownership stake in the company. Typically, angels, as they are known, will invest somewhere between $25,000-500,000 to help a company get started. In many cases, angels are the last option for startups that don’t qualify for startup business loans or may be too small to interest a venture capital (VC) firm.

Unlike VCs, however, which demand aggressive revenue growth quickly, angels are more concerned with the commitment and passion of the founders and the larger market opportunity that they have identified. While angels don’t want to lose their money, they aren’t typically as focused on making a quick buck as VCs are.

See also: The Entrepreneur's Guide to Small Business Finance and Accounting

Term origins

The term “angel” once referred to wealthy individuals in the Broadway theatre community who would step up to save a production from closing its doors. Centuries before that, we had patrons, who supported artists and creative professionals financially so that they could focus on creating new works. Angels are the modern-day equivalent of sympathetic financiers.

What angel investors want to see

While angels may make the difference between a startup’s growth or closure, they are, first and foremost, investors. They are not interested in giving their money away – they do want it back at some point. To improve their odds of getting their investment back, with appreciation, angels often consider the following when evaluating businesses:

  • Experience or track record of founders
  • Viability of business plan
  • An innovative or disruptive product or service
  • Whether the business is scalable
  • Existing revenue
  • An exit strategy

When making a pitch to an angel, keep these points in mind.

Finding angel investors

If you believe you’re a good fit for an angel investment, you’re probably wondering how to find one. Some of the most common connections happen through:

  • Lawyers
  • Accountants
  • Venture capitalists
  • Crowdfunding sites
  • Regional angel networks
  • AngelList.com

Start by asking your advisors, such as your attorney and accountant, who they know who might be a fit for your company and its financial needs.

Angel Investor FAQ

How does an angel investor work?

An angel investor is an individual who provides capital to a business or entrepreneur in exchange for an equity stake or convertible debt. Angel investors typically invest in early-stage companies with high-growth potential. They are willing to take risks on unproven companies and typically look for a return on their investment within five to seven years. Angel investors typically provide advice and guidance in addition to capital, helping the entrepreneur to build their business and increase the probability of success.

How does an angel investor get paid?

An angel investor typically gets paid through a return on their investment, either when the company they invested in goes public or is acquired. This return can be structured in the form of a one-time payout, or through a series of payments over time. Angel investors may also receive a portion of the company’s profits or a share of equity in the company.

What percentage do angel investors take?

The percentage of ownership that angel investors typically take in a company can vary, but typically it is between 10-20%.

Are angel investors rich?

It depends on the individual. Some angel investors are wealthy, while others may not have a lot of money to invest.