An angel investor is a high-net-worth individual who provides financial backing for small startups or entrepreneurs. Unlike venture capitalists who manage pooled money from other people, angels invest their own personal funds.

They are usually the first money in the door after friends and family.

The term actually comes from Broadway theater. It was originally used to describe wealthy individuals who provided money for theatrical productions that would otherwise have shut down.

In the business world, the concept is similar. They provide the capital necessary to bridge the gap between a raw concept and a functioning business.

The defining characteristic of an angel is that the money is theirs. This changes the dynamic of the investment entirely.

Because they are writing personal checks, they answer only to themselves. This allows them to make decisions quickly. Institutional investors often require committee votes and months of due diligence.

An angel can decide to fund you over a cup of coffee if they believe in your vision.

However, this also limits the check size. While a VC firm might deploy millions in a single round, typical angel investments range from $10,000 to $100,000.

It is vital to understand the difference between these two types of funders so you do not waste time pitching the wrong audience.

• Source: Angels use personal wealth. VCs use Limited Partner (LP) funds.
• Stage: Angels invest in the seed or pre-seed stage. VCs usually enter at Series A or later. But it is getting earlier all the time.
• Motivation: Angels often seek to mentor or give back. VCs have a fiduciary duty to maximize returns.

This does not mean angels do not want a return. They are taking a massive risk. They expect that most of their investments will fail. Therefore, they need the few that succeed to return 10x or more on their investment to cover the losses.

How does the transaction work?

In the past, angels would buy a percentage of equity directly. Today, it is more common to use a convertible note or a SAFE (Simple Agreement for Future Equity).

These instruments allow the investor to give you cash now. In exchange, that cash converts into equity later when you raise a larger round of funding.

It delays the difficult conversation of valuing a company that has zero revenue.

You should consider looking for angels when you have exhausted your own savings.

• You have a prototype.
• You have a clear vision.
• But you are not yet ready for the scrutiny of institutional capital.

It forces you to ask yourself a question. Are you ready to give up a piece of your company this early?

Taking angel money means you now have a partner. They might want updates. They might want to give advice. You need to decide if that capital is worth the equity dilution and the extra layer of accountability.