Angel Investors

These individual VC investors seem like they're from heaven, but be prepared to give up a chunk of your company for funding.

What It Is: Venture capital from individual investors. Angel investors look for companies that exhibit high-growth prospects, have a synergy with their own business or compete in an industry in which they have succeeded.

Appropriate for: Early-stage companies with no revenues, or established companies with sales and earnings. Companies seeking equity capital from angel investors must welcome the outside ownership, and perhaps the surrender of some control. In addition, to successfully accommodate angel investors, a company must be able to provide an "exit" to these investors in the form of an eventual public offering or buyout from a larger firm.

Angel investors are at once difficult and easy to find. Generally hard to find, but once you find them all of your hard work pays off in a big way.

Here are some ways to find angel investors:

• Call your chamber of commerce and ask if it hosts a venture capital group. Many such groups have a chamber affiliation.
• Call a Business development center near you and ask the executive director if he or she knows of any angel investor groups.
• Ask your accountant, or call a leading accounting firm, and ask the partner handling entrepreneurial services to point you in the right direction.
• Ask your attorney. They always know who has money.
• Call a professional venture capitalist and ask if he or she is aware of an angel investor group.
• Contact a regional or state economic development agency and ask if anyone there knows of an angel investor group.
• Call the editor of a local business publication and ask if he or she knows of any groups. These professionals often write about such activity.
• Look at the "Principle Shareholders" section of initial public offerings (IPO) prospectuses of companies in your area. This will tell you who has cashed out big.
• Call the executive director of a trade association you belong to. Ask if there are any investors who specialize in your industry.
• Ask your banker. A good banker knows of such groups because companies that have received an equity investment are good candidates for a loan.

Angel terms are usually structured this way:

• They initiate funding with a promissory note, defer monthly or quarterly interest payments for a year or two, and then exercise successive options at various performance benchmarks, converting the debt into an equity position of 15 to 30 percent (depending on the venture scope).
   
• They begin as passive creditors during the formative launch phase, but they'll want to see detailed financial statements every few weeks or once each quarter. They'll also require a seat on the board of directors and will hold the entrepreneur to a strict set of sales targets for the first one to two years.
   
• They initially take a cumulative convertible preferred stock position. They allow the firm to defer fixed cash dividends for four to eight fiscal quarters while holding a board seat and keeping the entrepreneur tied to the same performance measures as outlined in the first format.
   
• They take a common voting equity position right up front, have their place on the board and such but are also actively involved in company management. They may want to bring in one or two associates for 12 to 18 months to assist with the operations, marketing and distribution launch. This can often be the best situation for the entrepreneur and the angel. The owner gets funding and one or more people with specific business experience to help the business get going, and the investor gets a voting equity stake as well as hands-on involvement in running the firm to decrease some of the perceived risks.
   
• Overall, the deal hinges on the quality of the relationship between the angel and the entrepreneur. But remember, angels want to make a huge profit on their funds given the high risk of an early-stage venture. They'll require strict budgets and sales goals. But for the entrepreneur willing to give up some equity and perhaps share some decision-making, angel terms can provide an excellent funding source for new venture development.