An angel investor is someone who invests money (capital) in a new business (start-up) in exchange for either debt (a loan that converts to shares of ownership in the future) or a piece of the company (shares of ownership/equity). When you invest with people you know or are related to that’s called a Friends and Family round. You will learn about rounds, and so much more, during the monthly AngelCon investor meetings.
To be an “official” (accredited) angel investor, the SEC requires that you have a certain financial sophistication, whereby you understand the risks of investing in a start-up that may or may not succeed. (For more detail, see ‘Who can become an angel investor?’). An accredited investor is:
- An individual who has a net worth, either individually or upon a joint basis with a spouse, of at least $1,000,000, or has had an individual income in excess of $200,000 for each of the two most recent years, or a joint income with spouse, or spousal equivalent, in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year. -OR-
- An individual, who holds, in good standing, one of the following certifications or designations administered by the Financial Industry Regulatory Authority, Inc. (“FINRA”):
- the Licensed General Securities Representative (Series 7),
- Licensed Investment Adviser Representative (Series 65), or
- Licensed Private Securities Offerings Representative (Series 82) -OR-
- An individual, who is a “knowledgeable employee” within the meaning prescribed under Rule 3c-5(a)(4) of the Investment Company Act of 1940, as amended (the “Investment Company Act”) of a private fund exempt from registration pursuant to Rule 3(c)(1) or Rule 3(c)(7) of the Investment Company Act.
More details can be found here.
Besides providing capital, angel investors can assist a start-up in one of several other ways. An investor may have expertise/knowledge in a particular area that is meaningful to a company’s success. An investor might tap into their existing network of contacts to help a company by introducing them to people with expertise they need. An investor may be called upon by a contact in their network to help another company that they want to succeed. Over time you will become part of a community that helps one another.
You must qualify as an Accredited Investor to invest in companies beyond just friends’ and family companies. Accredited Investors must meet one of the criteria:
To qualify as an accredited investor based on your net worth, you must have a net worth of $1 million or more (excluding your primary residence); or
To qualify as an accredited investor based on your annual income, you must have had an annual income of $200,000 or greater (or $300,000 or greater combined income with your spouse) for the prior two years and have a reasonable expectation of the same or greater income in the current year.
To qualify as an accredited investor based on your work experience, you can be considered a “knowledgeable employee” who has a good understanding of the risks involved in angel investing.
The SEC states that the definition of accredited investor is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary”.
An angel network is an investment group made up of angel investors who pool their expertise to help select a group of early stage companies that are most likely to result in a successful return on investment. This expertise may include providing feedback to companies that are presenting, participating in due diligence (researching the company team, market, financials, etc), and voting on the companies with the greatest likelihood of success. Investors invest independently from one another.
In order to operate the Fund must have a minimum of 20 units purchased (see ‘What is a unit?’). An individual investor can have more than one unit. As an example, the Fund could have 26 investors with 7 units each or 91 investors with 2 units each, etc.
There is one basic fee.
Service Fee of $1,000, which is part of the $6,000 per unit paid. This fee is earmarked to cover the cost of fund administration over the life of the Fund. Once all the units have been paid for, the Fund Manager establishes a budget for the maintenance for the lifetime of the Fund.
A unit is an investment of $5,000, plus a Service Fee of $1,000 ($6,000/unit total cost). Investors can only invest by purchasing whole units (ie. One unit $6,000, two units $11,000, etc). The investment portion of the unit is what makes up the fund (see ‘What is a fund?’).