What is an angel investor?
An angel investor provides a large cash infusion of their own money to an early stage startup. In return, the angel investor receives equity or convertible debt.
Many angel investors are accredited, though not all are. Accredited investors must meet one of the two following criterion set by the Securities Exchange Commission (SEC):
Have annual earnings of $200,000 per year for the past two years, with a strong likelihood of similar earnings in the near future. If the angel investor files taxes jointly with their spouse, their required annual earnings increase to $300,000.
Have a total net worth of at least $1 million, regardless of marriage and tax filing status.
Pros and cons of angel investors
Angel investors assume greater risk compared to banks or venture capitalists. Angel investors aren't beholden to banks or institutions, so they can invest their money as they - and only they - see fit. That means the investment risks that traditional funders avoid may not be of concern for angel investors.
As an entrepreneur, you take on less risk compared to other funding options. In many cases, angel investors don't require repayment if your startup fails, making them a less-risky option for growing your company.
Angel investors have ample business knowledge. Many people wealthy enough to qualify as angel investors earned their money through entrepreneurship. While launching a startup, you may benefit from their business knowledge.
They require large stakes in your startup. The major disadvantage of angel investors is that their investment often gives them a large stake in your startup, which means you have less control over managing the business.
What is a venture capitalist?
A venture capitalist is an individual or group that invests money into high-risk startups. Typically, the potential for the startup to grow rapidly offsets the potential risk for failure, thus incentivizing venture capitalists to invest. After a set period, the venture capitalist may fully buy the company or, in the event of an initial public offering (IPO), a large number of its shares.
Pros and cons of venture capitalists
Venture capitalists supply startups with large investment sums. Venture capitalists often make large investments in companies, so if you need a substantial cash infusion to get started, venture capitalists might be your best funding option.
Venture capitalists present low risk to entrepreneurs. As with angel investors, venture capitalists often do not require repayment if the venture fails.
Venture capitalists provide ample knowledge and connections. Like angel investors, venture capitalists have ample relevant experience. They also have myriad connections - other investors, industry leaders, helpful third parties - that they utilize.
Entrepreneurs have less control over managing the business. Venture capitalists often require a controlling interest in your startup, effectively removing you from full leadership.
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