1

1

What are the benefits and downfalls of accepting angel investment versus taking out a loan to start a company? Which one is better (assuming that you can get both)? What happens if the company doesn't succeed under each of the types of funding above? What is the expected return in that case? Also, what is the expected return if a company does succeed in each of the types of funding above? Which is the safer option and why?

flag

4 Answers

1

A big part of this depends on your relationship with the angel investor. If it is someone you have a good relationship with and you trust that can be very beneficial. I took a loan from an angel investor when I started my company. I wanted to work with the investor over a bank because if I had a bad month and couldn't make a payment, the angel investor was going to be much more forgiving than the bank.

That scenario does not apply to everyone, so the pros and cons all change based on who the investor is and the type of deal you can expect from a bank these days.

EDIT: It should be noted that the typical "angel investment" deal is a equity arrangement and not a loan. If I have learned anything though from my time spent looking for funding, presenting business plans to venture groups and so forth it's that nothing is textbook. Everyone does business the way that works for them. Banks TYPICALLY do loans, and angels TYPICALLY do equity, but an angel can do for a loan and a bank can go for equity, it just doesn't happen as often.

link|flag
So, are you saying that obtaining funding from an angel investor is basically like taking out a loan? I had heard from a friend that angel investors don't expect any return if your company goes bankrupt (the way it was explained to me, the investor was taking a risk much like gambling), whereas a bank expected return, because in the end, there is an owner of a company who takes out a loan. Is this wrong? – tushark Jan 20 at 15:08
Actually, please see the answer below now. I believe you are wrong. If you think I'm incorrect, feel free to comment back here. – tushark Jan 20 at 15:47
1 
 You are neither right or wrong, you are working off of a generalization. An angel investor is an individual who is personally willing to invest in a venture. The WAY in which you can receive investment could be a loan or it would be an equity investment. Banks on the other hand really only do loans. What you go for really depends on what you want. I choose a loan from my angel investor so that once he is paid back I still have 100% ownership. – Justin C Jan 20 at 16:43
Thanks for the clarification. I didn't know that. I'd like to change my vote on your post, but it's too old - the only way for me to change it would be for you to edit your answer. Could you do that, as I think your answer should not have a negative vote? Thanks again! – tushark Jan 22 at 18:14
1

This is actually a very good question....

I have a lot of experience with the "loan" option but have attracted angel funding only once and that was for a relatively small amount.

When the business fails (I have lots of experience with that) the bank sends it's repossession dogs after whatever assets you put up for collateral for the loan. In the case of "angel funding" there are no dogs.

link|flag
Does that mean that you're not expected to pay back angel funding if you fail or that it just doesn't have the resources to send those "dogs" after you. Do you have to have collateral for obtaining angel investment? – tushark Jan 20 at 6:38
0

From Wikipedia:

Angel investments bear extremely high risk and are usually subject to dilution from future investment rounds. As such, they require a very high return on investment.[Reference] Because a large percentage of angel investments are lost completely when early stage companies fail, professional angel investors seek investments that have the potential to return at least 10 or more times their original investment within 5 years, through a defined exit strategy, such as plans for an initial public offering or an acquisition. Current 'best practices' suggest that angels might do better setting their sights even higher, looking for companies that will have at least the potential to provide a 20x-30x return over a five- to seven-year holding period.[Reference] After taking into account the need to cover failed investments and the multi-year holding time for even the successful ones, however, the actual effective internal rate of return for a typical successful portfolio of angel investments is, in reality, typically as 'low' as 20-30%.[Reference] While the investor's need for high rates of return on any given investment can thus make angel financing an expensive source of funds, cheaper sources of capital, such as bank financing, are usually not available for most early-stage ventures, which may be too small or young to qualify for traditional loans.

link|flag
0

Do you need Private Loan Lender with real and legitimate loan at a low interest rate of 3%. if you are interested feed us back for further procedure. contact e-mail: thomas@lendersglobe.com Lenders Globe Firm

link|flag

Your Answer

Not the answer you're looking for? Browse other questions tagged or ask your own question.