Angel Investors and Small Business Capital

Many people that have issues with obtaining capital from traditional funding sources often seek the assistance of an angel investor or other outside funding source. One of the best benefits of working with this type of capital source is that you have very little online if your business does not go as planned. This primarily due to the fact that angel investors, private equity groups, and angel investors do not require that you provide a personal guarantee as it relates to the investment that they make into your small business. However, in exchange for not having to place you personal assets on the line, you will be required to give up a significant portion of your business to a third party. These third parties, in many instances, may be able to take control of your business at any time if you do not perform to the standards set forth in the investment contract.

As it relates to your agreement with a private investor, you are going to need to have well defined milestones in place that allow you and your private funding source to understand what is expected as it relates to profitability, a positive cash flow, and the sale of the business at a determined time. We recommend that when you are presenting your business to a third party private investor that you have a defined and reasonable strategy as to how your business will grow as it relates to your business operations. You and your appropriate counsel can develop this methodology directly within your business plan. Additionally, it should be noted that your milestone documentation can be provided as a separate document that will go into both your business plan as well as the investment contract that you intend to have with a private investor.

In closing, angel investors are a great way to finance a small business especially if it does not meet the requirements set forth by a bank or the Small Business Administration. However, it is important to note that there a substantial number of issues that come when you work with an outside or private funding source. As mentioned above, you are going to need to provide both equity and control to these investors. As such, you should make sure that you are appropriately seeking this capital because you have a business concept or existing business that is in need of capital for expansion purposes. Your ability to obtain this capital will ultimately be based on the economic viability of your business.