What Do Angels Look Like?

No standard "angel" profile exists, but these investors are often individuals or groups of either local professionals or business people who are interested in assisting new businesses that will enhance the immediate community. They are not typically interested in controlling the business, although they usually want an advisory role. In addition, they may make financing contingent upon the business's adherence to certain goals or practices.

Most entrepreneurs already recognize that potential "angel" investors for their business might be just about anywhere. Networking within your community and your business circles can often provide a good starting point. Potential financing contacts can arise through your business associates, affiliations with relevant trade associations, inquiries through your local banker, accountant or attorney, local chambers of commerce, and through other small business entrepreneurs.

Work Smart When looking for "angel" investors, do your best to shop for "smart money"; in other words, try to get more from an angel than just financing. Many angels will serve as advisors, or on a board of advisors, to offer the value of their experience and strategic advice on operating the enterprise. In addition, the angels will frequently use their own connections to assist the business in finding additional financing growth opportunities, favorable suppliers, new customers, etc.

The terms of angel financing depend entirely on what you can negotiate with a particular investor, but almost any type of debt or equity financing is a possibility.

Some angels may offer loans at very low interest rates simply to help a new business or the community; others may expect specific rates of return on an equity investment. Some deals involve a debt instrument that allows the investor an option to convert the debt into an equity investment at either a specified time or if certain conditions are met. The investor can thereby protect himself or herself by retaining a debt claim if the business does not do well or can profit by converting the interest into equity ownership if the business succeeds.

Most commonly, however, angels will want an equity interest in the business and some guaranteed "exit" provisions, such as a mandatory buyout, a "put" option requiring the business to repurchase the stock at the investor's option, or a public offering of stock . In a five-year period, angels might expect a return on investment of three to five times their initial investment, while a venture capital firm might want a return of five to 10 times its original investment.