Table of Contents
How much equity do angel investors usually get?
Determining an angel’s equity
How angels invest
Time to returns
Safeguards for angels
The bottom line
Do Angel Investors Get Equity and How Much?
Do Angel Investors Get Equity and How Much?
Jun 9, 2022
6 min read
Angel investors typically seek an equity stake of 20% or more for putting their own capital into a startup. Although, most angels are interested in more than equity.
A person gains equity in a company by buying its stock, or builds equity in a house by paying down the mortgage. Equity simply represents an ownership stake, be it in a company, a home, or a startup.
is a type of equity financing. Wealthy individuals risk their own capital to back fledgling firms in return for equity—a piece of the business.
If the startup fails, as up to90% do, the investors lose the money they’ve put in. But if the venture succeeds, the investors receive returns proportionate to their equity stakes. Angel investors in Uber, for instance, invested as little as $5,000 apiece when the ride-hailing startup was little more than a concept. These initial investments delivered multi-million-dollar profits when Uber’s business took off.
So do angel investors get equity? The short answer is yes. But the specifics are, of course, more complex.
Angels typically seek stakes of at least 20% in the startups they fund. Some backers ask for as much as 50%, especially in the very early going. Although angel investors are usually individuals, the funds they invest can come from a business entity, a trust, or an investment fund, among other sources.
Most angels are interested in more than equity. Many are corporate leaders, business professionals, or successful entrepreneurs themselves who want to nurture young companies.
Not every would-be angel can participate. The Securities and Exchange Commission allows onlyaccredited investors to take part. They must have net assets of at least $1 million, not including their home, or annual income of more than $200,000 or $300,00 for married couples. Professional knowledge andcertifications may also be important. The SEC is considering furtherrevisions to its guidelines.
Each angel investment is unique in its terms and structure. But investors can apply some general principles to maximize the equity they receive and improve the chances the business—and thus their investment—will succeed.
Angels usually invest during the pre-seed or seed stages of startup financing. They might invest after the business raises money from family and friends, and before venture capital investors appear with their often-bigger checks.
Angels are typically more interested in companies that show promise in the earliest stages rather than those that are further along. That’s because fledgling companies command lower valuations, meaning angel investors receive a bigger stake for the dollars they put in.
Individual angels usually invest between $5,000 and $150,000. A round of angel funding relies on more than one person. A typical round can bring in three to five different investors, with the total investment averaging between $100,000 and $250,000. The investors receive equity commensurate with their contributions.
Angels also pool their capital and expertise to make larger investments by joining formal investing groups and syndicates. These groups usually target an industry or geographic region and use local contacts to scout for opportunities. Angel groups often raise $1 million or more for their chosen targets. In April 2022, there were 444angel networks in the U.S. that connect investors with entrepreneurs.
Angel investors and entrepreneurs can use calculators to determine how much equity their investment dollars will buy—and how much of the company the founders are giving up—based on the company’s valuation. A $50,000 investment in a million-dollar company, for example, yields a 4.76% stake; the same investment in a $5 million company confers just a 0.99% share.
Note that startup valuations are usually subjective and can be based on the venture’s financials, comparable businesses with successful exits, and the makeup of the founders and team.
Angels can gain equity in a startup by providing funds in three ways.
. Angels can acquire a direct equity position, such as a 20% to 30% stake in the business. The percentage depends on the startup’s valuation and other metrics. Investors may appoint associates to help manage the business to safeguard their interests.
. Angels may offer the startup a loan that can be converted into an equity position once the company takes off. These angels generally require a 20% to 30% equity interest and other benefits, such as a seat on the company’s board.
. Investors provide funding in exchange for preferred stock that can be converted to equity in the company at an agreed-upon price per share. The shares provide added investor protections such as control rights, prevention of dilution, and preference if the business is liquidated.
Angels and entrepreneurs work out the funding and equity details in a nonbinding agreement that covers basic deal terms and conditions. This term sheet is the foundation for a more extensive, legally binding document should the investment proceed.
Angel investing takes patience and nerve. Very few startups reach a stage where they return any profit to investors—and most collapse and take the angel money with them.
Angel investors can profit if they’re able to sell part or all of their ownership stake in what’s called an exit. The sale can occur during an initial public offering (IPO), acquisition, venture capital buyout, or other approach. The exit lets the investor liquidate their share and make money if the company is successful.
Early investors often expect to get their money back in five to seven years. Successful investments can take 10 years or more to produce a return. Uber, for instance, held its IPO nine years after it received its first round of angel funding.
Angels typically seek to recoup their initial investment—and hopefully more. Studies suggest a portfolio of angel investments can return 27% or greater – with many variations and caveats.
With poor odds for both a startup’s success and an investor’s profits, what can angels do to safeguard their investment dollars?
First, they can insist the terms of their investment deal cover potential stumbling blocks:
Angels want to guard against financial losses if the company they’re backing sells shares to another investor for less money. An anti-dilution clause can specify that the angel investment be recalculated to a lower price if this happens, providing more equity for the original investor.
Angels want a voice in company governance and actions. Control clauses typically require investors to approve in advance any merger, acquisition, or other event that changes the company’s control or seeks to liquidate the firm.
Angels want the option to participate in future financings, especially if the investment is thriving. So-called pro-rata rights let angels invest more. The rights may be open-ended or capped to maintain the investor’s original ownership percentage.
Angels can also work to safeguard their investment by using their talents, experiences, and networks to help a young business succeed. Roles include:
Angels can provide business advice and emotional support.
Angels can network to attract customers and provide expertise.
Angels can advise on interviewing and hiring decisions and refer people they have worked with.
Angels can use contacts and social media to create a buzz for their companies.
Angels with relevant technical knowledge can test products and apply their skills.
Angels may take a board seat to provide higher-level oversight and direction.
Angel investors typically seek an equity stake of 20% or more for putting their own capital into a startup. The ownership stake can pay off for investors willing to wait the five or more years for a successful exit that will deliver returns commensurate with their equity. Angels can safeguard their equity by taking an active role in the business and insisting on terms that give them special rights and protections.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
Angel Investors vs. Venture Capital vs. Private Equity: Key Differences
When discussing investments, all three can fund startups and get paid out if the company is sold or goes public, these funding types have distinct differences.
Angel Investing vs. Private Equity: What Are the Differences?
Angel and PE investments both involve risk, high-net-worth individuals, and are made for the same reason but are two entirely different categories of private investment.
How Does an Angel Investor Make Money?
Angel investors make money by backing very early-stage startups they find promising, in exchange, they receive an ownership stake and expect returns if it succeeds.
What Are Angel Investing Returns Like?
Angel investors can increase their chances of bigger returns by expanding their portfolios and providing their professional knowledge to get companies off the ground.