Angel ROI: How Much Equity Should You Expect To Give an Angel Investor

Written by Dave Lavinsky

Equity amounts for angel funding

When pursuing funding for your company, you are bound to consider angel investors at some point. They are a common source of early-stage funding and can provide the boost your company needs to get off the ground. But before taking angel money, it is important to understand how these investors work and how much they expect in return. This guide will explain everything you need to know in terms of angel investments, ROI, and what to expect in terms of equity.

 

How Most Angel Investors Invest In Companies

Angel investors are typically wealthy individuals who invest their money into companies in exchange for equity. They are often former entrepreneurs themselves or have some experience in the industry in which the company operates. Because they are investing their own money into the business venture, an angel investment tends to include more hands-on management than venture capitalists investment.

There are three ways that angel investors typically invest in companies:

  1. Direct equity stake: The angel investor buys shares of the company outright and becomes a shareholder.
  2. New Business loans: The angel investor loans the business owners money with the expectation that the loan will be paid back with interest.
  3. Convertible preferred stock: The angel investor purchases shares of preferred stock that can be converted into common stock at a later date.

 

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What Is The Average ROI For Angel Investors?

On average, potential angel investors expects to see a return of about 27% or 2.5 to 3 times their initial investment within 5 to 7 years. This means that if an angel investor invests $100,000 into a company, they expect to see a return of $250,000 to $300,000 over the next 5 to 7 years.

However, it is important to keep in mind that angel investing is a high-risk, high-reward venture. While some angel investors may see returns of 10x or more, others may end up losing all of their investment. Some angel investors may ask for a higher equity stake in exchange for a lower ROI, while others may be more flexible. Most angel groups invest knowing that very few startups succeed, which is why they do not tend to start with larger investments. 

 

Factors That Affect An Angel Investor’s Equity

There are a few key factors that will affect how much equity an angel investor will receive in return for their investment.

  • Company’s Valuation: The pre-money valuation is the value of the company before the angel investor makes their investment. This number is important because it will determine how much of the company the angel owns after they invest, and what their equity positions will be.
  • Timing: The angel investor’s equity stake will also be affected by when they make their investment. If the angel invests in the first round or early on in the company, they will likely receive a larger equity stake than if they invest later down the road.
  • Their Initial Investment: The size of the original investment helps to dictate the equity the angel investor receives. Typically the larger the angel’s investment, the more equity they will receive.
  • The Amount Of Money The Company Needs: If the company is seeking a large amount of money or venture capital, the angel’s equity stake will be diluted more because they will own a smaller percentage of the company.

 

What Ownership Stake Should You Offer an Angel Investor?

As a general rule of thumb, angel investors usually receive between 10% and 20% ownership stake in the companies they invest in. However, there are a few factors that can affect how much equity an angel investor will receive.

 

Factors Affecting Ownership Stake for Angel Investors 

Stage of the Company

If the company is early or startup stage and has yet to generate any revenue or annual income, the angel investor will likely receive a larger equity stake. However, if the company or small business is further along and has already generated some revenue, the angel investor will likely receive a smaller equity stake.

Investment Amount 

As mentioned before, the more angel’s provide funding, the more equity they will receive. This is often discussed before any deal is made and clearly outlined on the term sheet. 

Investor’s Experience 

If the angel investor has a lot of experience in the industry or are accredited investors, they will likely receive a larger equity stake. However, if the angel investor is new to the industry, they will likely receive a smaller equity stake.

When business owners decide to look for angel funding, they will usually negotiate their equity as well as their ROI with the angel investor. Some angels may ask for up to 50% equity in the company, while others may be willing to accept a lower equity stake in return for a higher ROI. Others still may be willing to offer equity financing to allow for some form of equity along with a business loan. There are many different options available when businesses find angel investors, so be aware that you will need to negotiate with investors in order to come to an agreement that is fair for both parties.

 

When Do Angel Investors See A Return?

An angel investor typically sees a return on their investment within 5 to 7 years. However, it is important to keep in mind that angel investing is a high-risk, high-reward venture. While some angel investors may see returns of 10x or more, others may end up losing all of their investment.
 

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What Are Other Ways That Angels Earn From Their Investments?

There are a few other ways that angels can profit on their investment. They may negotiate these terms in order to ensure they get some money back no matter what the outcome of the company is. Three of these strategies include:

  • Exit strategies: One way that angel investors earn from their investments is through successful exits. An exit strategy is a plan for how the angel investor will get their money back when they sell their equity stake in the company. There are a few different exit strategies that angel investors may use, such as an IPO (Initial Public Offering) or a sale of the company.
  • Dividends: Another way that angel investors can earn from their investments is through dividends. Dividends are payments that angel investors receive from the company in return for their equity stake. The amount of dividends that an angel investor receives will depend on the company’s profitability and the angel’s equity stake in the company.
  • Employee Compensation: Some angel investors may negotiate a role in the company in return for their investment. This could include a board seat or a position as an advisor. Angel investors who take on this type of role will typically receive some form of compensation, such as a salary.

Angel investors play an important role in the startup phase for many businesses, and is often included in their initial business plan. They provide much-needed funding for early-stage companies and help them to grow and scale. In return for their investment, angel investors usually receive equity in the company. It’s important to remember that angel investors are taking on a high risk by investing in early-stage companies. Therefore, they usually expect to see a high return on their investment. Keep this in mind while negotiating with angel investors, as you will need to come to an agreement that is fair for both parties.

 

Frequently Asked Questions

The average ROI for angel investors is 27% within 5 to 7 years. However, it is important to keep in mind that angel investing is a high-risk, high-reward venture. While some angel investors may see returns of 10x or more, others may end up losing all of their investment.

An exit strategy is a plan for how the angel investor will get their money back when they sell their equity stake in the company. There are a few different exit strategies that angel investors may use, such as an IPO (Initial Public Offering) or a sale of the company.

 

Dividends are payments that angel investors receive from the company in return for their equity stake. The amount of dividends that an angel investor receives will depend on the company's profitability and the angel's equity stake in the company.

 

 

Finish Your Business Plan for Angel Investors in 1 Day!

Don’t you wish there was a faster, easier way to finish your business plan?

And know it’s in the exact format that equity funders like angel investors want?

With Growthink’s Ultimate Business Plan Template you can finish your plan in just 8 hours or less!

Click here to finish your angel investing business plan today.

 

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