Angel Investors: Types, Advantages and Disadvantages

By Indeed Editorial Team

Updated 30 October 2022

Published 22 July 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

If you're in the early stages of starting a new business, funding from angel investors can be very helpful. Working with such investors provides you with financial capital as well as access to their expertise and financial wisdom. Understanding the advantages and disadvantages of obtaining this funding can help you determine whether it is right for your business. In this article, we discuss what angel investors are, the advantages and disadvantages of having them, and whether it's best for your business.

Related: Types of Funding for Businesses (Definition and Importance)

What are angel investors?

An angel investor is someone who provides funding to business owners, startups or entrepreneurs. These investors typically have a high disposable income and want to invest in a startup because they believe that the company can deliver a high return on investment (ROI).

Types of angel investors

There are several types of investors in this category, including:

  • Family and friends: this is the most common type of angel investor.

  • Philanthropists or wealthy individuals: people with a high net worth (such as philanthropists) may offer businesses a large investment of capital in exchange for equity in the startup.

  • Groups or organisations: occasionally, several individuals get together to operate as a group, raising the amount of capital that they are able to invest in the startup.

  • Crowdfunding: this type of funding has become increasingly popular, and involves people investing small amounts of money online to fund a specific cause.

Related: Traders vs. Investors: Definition and Key Job Differences

Advantages and disadvantages of having angel investors

Receiving funding for a startup can be a complex process. Here are some advantages and disadvantages of having angel investors:

Advantages of having angel investors

Angel investors provide funding at low financial risk to the owner of the startup. Unlike taking out a loan, there is no need to return the funds or pay interest. Angel investors can also help by guiding the startup, as it is in their interest to see the company succeed.

Disadvantages of having angel investors

Angel investors often ask for a large percentage of equity in exchange for their funds, as they're taking on a sizeable risk by investing in a new startup. Many business owners end up giving between 10-50% of their startup to angel investors. These angel investors may also ask for a high ROI, which may put pressure on a new company to deliver results quickly.

How to decide if angel investors are right for your company

If you are considering having an angel investor on board, follow these steps to decide if it's the right choice:

1. Develop a business plan

Create a comprehensive business plan to ensure that your startup has a strong direction and identity before any new investors come on board.

Related: What Is Business Strategy Development? (With Examples)

2. Clarify the angel investor's offer

It is important to understand what your investor's perspective is and what they want specifically from your startup before accepting an investment. Be sure to pen down the agreement in writing, so that everyone has clarity on what the deal will provide for all parties involved.

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3. Establish roles in the business

It's also important to clarify the angel investor's role and responsibility in the company if you choose to move forward, to prevent future conflicts.

Related: Management Skills: Definition and Examples

Common questions about angel investors

Here are some common questions and answers:

What percentage of the company would angel investors own?

There's no set percentage when it comes to angel investors. Typically, investors will ask for a higher percentage if their investment is sizeable.

Do you have to pay them back?

Angel investors typically don't ask for their funding back. However, since they have a stake in the company, what they expect is a return on their initial investment.

Related: Big Company vs. Start-up: Definitions and Comparisons

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