What is an angel investor?
An angel investor is someone who gives money to a start-up company in exchange for a stake in that company.
How much equity do angel investors get?
That depends. When you decide how much of your company to give an angel investor, you are vicariously deciding the value of your company. For instance, if you offer an angel investor 10% of your company in exchange for his $500,000.00 investment, you have valued your company at $5,000,000.00 (500,000/(.1)=5,000,000). This is a business decision.
Why do people decide to make an angel investment?
As with any investment, the reasons a person may choose to invest in an extremely new start vary. That being said, there are a few fairly common reasons. For example, angel investors often have the opportunity to get a large share in a company at a pretty low price. If the company takes off and grows really big, he/she has made a ton of money. Additionally, some states offer tax credits for angel investors. Some angel investors are relatives of the founders, and some just really believe in the company.
How do angel investors make money?
Angel investors make money by “hitting it big” on the right company. For example, an angel investor may give a start-up company $100,000.00 in exchange for a 10% ownership interest in the company. The company does well, and in ten years increases in value by 10,000% (it is 100x its original value). The company is now worth $100,000,000.00, so a 10% ownership interest in the company would cost a new investor $10,000,00.00. Because the angel investor got in early, however, he was able to get his hands on that same 10% ownership interest for a mere $100,000.00. As a result of his smart investment, he has grossed $9,900,000.00. Simple!
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