What Are Angel Investors and What Do They Do? A Complete Guide

ByVladana Donevski
May 17,2022

Do you have a great business idea but don't have the money to get it off the ground? If so, you should look for an angel investor.

So what are angel investors? How does angel investing work, and what are the advantages and potential pitfalls to look out for? We’ll answer all of these questions in the following blog post. We'll even take the time to compare angel investors to venture capitalists to help you make the best decision for your business. 

Angel Investor Definition

An angel investor is someone who funds a startup company, usually in exchange for convertible debt or ownership equity. Some team up with other investors to form small angel investor groups operating under the umbrella of the Angel Capital Association or ACA. Those who prefer to avoid the commitment of traditional investor groups can join online syndicates instead.

Who Can Be an Angel Investor?

While anyone who has the money to back a business can be an angel investor, most angels are either accredited investors or sophisticated investors.

According to the Securities and Exchange Commission or SEC, an accredited investor is an individual with a net worth of over $1 million in assets, excluding any residences. The other metric used to discern accredited angel investors is that they have to have an annual income of over $200,000 (or $300,000 for couples) for the previous two years.

Angel investors do not necessarily come from a financing or business background. They can be lawyers, doctors, accountants, c-level executives, or small business owners who have successfully helped kickstart other companies.

How Does Angel Investing Work?

When it comes to angel investments, there are a few different ways for the investment process to play out.

One of the most common methods is for the angel investor to provide seed money to a business that needs help in the early stages in exchange for convertible debt or ownership equity. In short, angel investors expect sizable returns in the long run.

Another angel investing method involves the purchase of equity-backed securities. Investors provide capital to a business in exchange for stock ownership. This type of angel funding is more common with larger businesses that are looking for a more hands-off approach from their investors.

Once the angel investor provides the capital, they typically take a back seat in terms of day-to-day operations.

Of course, there are always exceptions to this rule, and some angel investors do take an active role in the businesses they invest in. However, most angel investors simply provide the initial funding and let the business owner(s) take it from there.

The Pros and Cons of Angel Investors

Just like any other type of investment, you need to weigh the pros and cons of angel investments.

Let's start with the pros:

One of the biggest advantages of working with an angel investor is that they can provide the capital you need to get your business off the ground. This is especially helpful if you don't have sufficient personal funds or you don't qualify for a traditional bank loan.

Another advantage is that angel investors are typically more flexible than other types of investors, such as venture capitalists. Some angel investors raise the money through their syndicates or crowdfunding sites. Furthermore, angel investors for startups understand that these are risky investments and often have a long-term approach.

Lastly, if you manage to land an angel investor who is an accomplished entrepreneur and willing to actively participate in the growth of your business, you can make use of their network and expertise.

Now, let's take a look at some of the cons:

The biggest downside to working with an angel investor is that it may require you to surrender a larger portion of your company than you would if you went with another type of investor. This is because angel investing is risky, and the funds are typically provided early on.

The return on investment for angels depends on the investment opportunity, but it’s not unusual to see some angel investors expect a 30% ROI.

Another downside to working with angel investors is the fact that you’re losing your decision-making powers. This is because some angels will want a seat on the board, or they may want to be involved in major decisions.

That’s why an angel investment from someone with expertise in your field is an ideal option. It is not uncommon for angel investors to try to implement unrealistic business decisions, creating a struggle within the company.

Where to Find an Angel Investor?

There are a few different ways for business startups to find angel investors.

One way is to search online directories, such as the Angel Investment Network or Gust.

Another way is to attend startup events or pitch your business ideas at the appropriate forums, which can be a great way to meet potential investors.

Lastly, you can try going through a business accelerator program, as they typically have a network of angel investors that they work with.

All in All

There are a lot of things to consider when it comes to angel investments. While they are a great option for startups and small businesses that are struggling with financing, giving up a part of your business in exchange for the funds is not necessarily the wisest decision.

Do your research and take your time to find an investor who is a good fit for your company and your business goals. And remember, the most important thing is to have a clear understanding of the terms of the agreement before you accept any funding.

What percentage do angel investors get?

The percentage an angel investor gets depends on a number of factors, including the size of the angel investment and the state the business is in. Angel investors typically offer funds in exchange for an equity ownership interest.

Is angel investing a good idea?

There is no straightforward answer to this question. Angel investors can provide much-needed financing to small businesses and startups that might not be able to get funding from other sources. On the other hand, giving up a part of your business in exchange for their financing can be a risky move, and it's important to make sure that you are getting the funds from someone who is a good fit for your company.

Why are they called angel investors?

Our guide answers the more basic question: what are angel investors? Since they provide funds to startups, they are often seen as heavenly beings who bestow their blessings upon fledgling businesses. In other words, angel investors are seen as people who provide much-needed help and support to businesses that might not be able to get funding from other sources. 

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Cooking content creator If you love cooking but don’t want to cook for others, content creation is one of the best food business from home ideas available. It’s affordable, puts you in full control, and allows you to work around another job until the time is right to go full-time. As far as food business ideas with low investment go, it is ideal. Better still, you can afford to make mistakes when making prerecorded content. It could be a video series teaching people to cook, a podcast, a blog, or any other form of content. There are many ways to monetize online content in 2022. So, as long as you’re consistent with publishing new content, it can be a smooth path ahead. Restaurant business It may be the most obvious food business idea of all. However, there is no question that restaurants can be hugely successful. People are eager to enjoy life after the endemic, and restaurant meals are a tried-and-true choice. A successful restaurant will rely on several key factors. 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Think carefully about food business name ideas as this will set the foundation for building a great brand.  Always hire the right people for your food business ideas because there is only so much you can do with one pair of hands. Adapt. For example, 30% of fast-food restaurants now offer healthy options for kids. You can’t be stuck in the past. Know your market and competitors. Opening the wrong type of business due to a lack of demand or space within the arena is one of the most common reasons small businesses fail. The Final Word on Food Business Ideas By now, you should have a good grasp of the available online food business ideas, food business from home ideas, and profitable small food business concepts. Likewise, you should know the answers to questions like “Are food trucks profitable?” and “What foods can I sell from home?” You have the ingredients for success. Now is the time to turn them into a dish that secures your future.
By Damjan Jugovic Spajic · May 10,2022
The phrase “licensed, bonded, and insured” is omnipresent in some industries. You’ll find it in the company's tagline, marketing media, and client contracts. Far from being just an advertisement strategy, being “licensed, bonded, and insured” carries a lot of meaning. And, for some companies, getting relevant licenses, insurance, and surety bonds is a legal requirement.  But, while being insured and licensed is standard practice for many companies, not many first-time business owners are familiar with the third term. So what does bonded mean? For most customers, ensuring that the business or contractor they hire fulfills all legal requirements is essential - and a significant factor in their decision-making process. Let’s look at the different terms and why your company needs to be bonded, licensed, and insured.  Licensed, Bonded & Insured – Let’s Start With the Basics The phrase “licensed, bonded & insured” has been conceptualized as a quick way to let clients, contractors, and suppliers know that a business meets all industry-specific legal requirements.  Each of the terms in this phrase carries a lot of meaning, and using it as part of your tagline is not something to be taken lightly. But what do the different terms mean? Let’s start with “licensed and insured.” Licensed Licensed means that business owners, employees, and managers have the necessary competencies and skills to carry out niche-specific tasks efficiently and safely. These competencies are assessed through standardized tests and certifications that need to be acquired. Licenses are industry-specific, and the more technical a business is, the more licenses it will require to protect clients, employees, and suppliers. In customers' eyes, a licensed company has taken all the necessary steps to protect the public’s health and safety and can guarantee high work standards.  Insured Insured shows that your company has acquired the necessary insurance to cover consumers and the company itself in the case of losses, accidents, or injuries. If a business is advertised as licensed, it has purchased insurance covers such as general liability and workers' compensation.  Pro tip - It’s helpful to acknowledge that each business is unique and, depending on the industry and niche you operate in, you will need to purchase different insurance policies. Because of the complexity of this step, partnering with small business insurance providers can help.  So, now that you are clear on what “insured” and “licensed” mean, let’s look at the third term: what does it mean when a company is bonded? What Does Bonded Mean? If your business is licensed and insured, you are now probably wondering whether it also needs to be bonded.  In business, “bonded” means that a company has purchased a surety bond. A surety bond is a financial instrument that allows a business to protect another party, such as a client or customer.  If the business fails to deliver the expected results, fails to comply with industry requirements, or doesn’t fulfill its obligation, the surety bond provides compensation to the customer.  Each surety bond provides a certain amount of coverage. The bond cost is a percentage of this amount, usually varying between 1-15%. If your business wishes to purchase a premium (bond amount or bond limit) of up to $20,000, you will need to pay between $200 and $3,000, depending on your bonds’ underwriting provider. The amount you’ll need for your company - and the rates you’ll be able to secure - will depend on your industry, niche, application specifics, and credit health. Surety Bond Definition Now that you know what to expect from a surety bond let’s look at the technical definition of this financial product.  A surety bond is an agreement or contract between three parties: the surety, the principal, and the obligee. This legal document is designed to guarantee that the obligations of a business owner (or principal) are fulfilled. It transfers the risk from the business owner to a third party (the surety provider or the government). While there are different types of bonds, a bonded company is always preferable to customers, who will receive compensation even if the business fails to meet its obligations.  How Do Bonds Work? When a company purchases a surety bond, it becomes liable for any obligations that are not fulfilled and guarantees the client that they will be able to receive third-party compensation. But how do these contracts work?  Firstly, there are three parties involved in the agreement: The principal is a surety bond’s principal, the entity buying the bond. A principal might be a person or business.  The obligee is the entity (person or business) that might need to be protected by the bond. The surety is the bond contract provider, which is paid by the principal and responsible for producing compensation to the obligee if the principal doesn’t meet obligations.  It’s worth noting that the principal will be required to reimburse any payment (penal sum) made by the surety.  Being Bonded vs. Insured: What Are the Differences? Business bonding and insurance are commonly confused. After all, both protect a third party and the company itself. But some radical differences set them apart. Here are the main three to simplify these concepts: The number of parties involved - insurance policies are agreed upon by two main parties: the insured (the company or business owner) and the insurer (the insurance policy provider). On the other hand, surety bonds involve three parties, and each contract will need to be crafted depending on unique circumstances. Bonds serve a different purpose - the main difference between an insurance policy and a bond is that an insurance policy is designed to protect the policyholder. In contrast, the bond protects the third-party obligee, the bond holder’s client. Bonds need to be reimbursed by the bondholder - when an insurance claim is filed, the insurer covers the liability. In the case of surety bonds, the holder needs to refund the payments made.  Unpreventable accidents or injuries might lead to insurance claims filing. Oppositely, surety bonds claims might indicate that the holder has carried out improper business practices that have led to financial losses for their clientele. That is why companies purchasing surety bonds will want to avoid any claim that might affect their reputation.  What Companies Need To Be Bonded?  While surety bonds are not needed for all industries or businesses, some companies can’t start operating without this added layer of legal and financial protection. Just a few of the niches that require surety bonds are: Contractors and construction companies Health clubs Insurance brokers Auctioneers Travel agencies Janitorial services Auto dealers Medical equipment providers Notaries public Purchasing a bond means that your clientele is protected in the case of unethical or improper business practices. Therefore, businesses operating in other industries - such as painting or plumbing companies - might provide consumer protection through a bond, representing a competitive advantage.  Types of Surety Bonds While there is a range of bonds your business might need, most surety bonds fall into the following categories: Construction Bonds - construction bonds are explicitly designed to protect clients and contractors in the construction industry. Some of the most popular construction bonds are bid bonds, payment bonds, and performance bonds. They cover a client against failed obligations, missed payments, and performance shortfalls during the bidding process.  Fidelity Bonds - fidelity bonds are designed to protect a business from employee misconduct or criminal acts, including dishonesty and theft. Commercial Bonds - commercial bonds include license, permit bonds, and bail bonds. Governmental and state agencies require the first to ensure that the business will carry out tasks per governmental regulations. The second is designed to help defendants leave jail during a criminal or civil case. Surety bonds requirements vary from state to state and from one industry to another. Make sure to check the laws applicable in your area.  Cost of Getting Bonded As we have seen above, the cost of getting a surety bond will be calculated as a percentage of the premium required. This percentage can vary but usually falls in the 1-15% bracket.  However, the cost of surety bonds is also influenced by many factors. These include: The type of bond - Some bonds, such as license and permit bonds, are straightforward and benefit from fixed prices. Others, such as fidelity and court bonds, can be more expensive and even require collaterals worth 100-110% of the bond amount. Underwriting requirements - if you are after an instant issue bond, you won’t need to undergo any credit check and pay a fixed rate. However, options such as credit-based bonds can give you access to better rates. Still, they involve underwriting (or the process of assessing the risk and premium of the bond) and are subject to your creditworthiness.  Your financial history - most surety companies won’t want to run any risk when granting you a bond. In the case of credit-based bonds, they will review your financial history and offer you relevant terms. If the applicant has good credit, the bond’s cost will be 0.5-5% of the bond amount, but someone with poor credit might need to pay between 5% and 20% of the bond amount.  The length and specifics of the surety bond might also influence the contract’s price. 
By Vladana Donevski · July 28,2022

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