A How-To Guide On Angel Investors

By Paul Lewis

How do you know if your business needs an angel investor?

An angel investor can help provide much needed capital to a young business. However, if your business isn’t healthy to begin with, then extra cash will not help it. An angel investor is most interested in a young company that is about to pop. The money might be needed to develop a new product, fund a large order, create an additional revenue stream, or some other event that will “pop” the business.

An angel typically invests much less into a company than a venture capital firm, but the due diligence is shorter. If you have a good rapport with the angel and he likes your business, a deal can be struck almost immediately. It is critically important to know exactly how much money you need and exactly what you will use it for. If your business has a big opportunity which requires up front capital, an angel may be right for you. Angels typically invest in the $100K to $500K range and will want to receive a generous piece of the company for the investment; so be prepared to part with about 25% to 35% of the business.

Angels are early stage investors, meaning they usually get involved at the inception or shortly thereafter. Some angels will make an investment to launch a new company based on nothing more than a business plan, while others may want to see some traction in the marketplace before handing over a check. Your business does not necessarily need to be generating a profit (or even have revenue) as long as the angel can see a way to make the business work.

1. Make sure your business is healthy
2. Know exactly how much capital you need and exactly what it will be used for
3. Be prepared to part with a big chunk of equity
4. Consider an angel at inception or shortly thereafter
5. You do not necessarily need to be profitable to attract an angel

Click ahead to find out if an angel is right for you!


Paul Lewis

Is an angel right for you?

An angel sits somewhere between your “friends and family financing” and a venture capitalist. The typical range of financing is between $100K and $500K in exchange for a fairly large chunk of your equity. Equity financing is when you receive cash in exchange for equity while debt financing is when you receive cash and must pay back the principle plus a negotiated interest rate or finance charge.

Since most angels provide equity financing, there is usually no need to pay the money back. Of course, different investors have different rules so it is important to clearly understand the terms of the agreement. If your company is losing money, make sure you understand why before speaking to an angel. An angel will not be interested in financing your business if he thinks it is just a hobby for you. If you have tapped out all of your credit cards, cannot get another dime from your parents, and are too small to be noticed by a venture capitalist, an angel may be your perfect solution.

Click ahead for tips and tricks on how to get your business financed

By Paul Lewis

Tips and Tricks to help your business get financing

The best way to grow a company is by re-investing your profits. This is not always possible because many businesses are not profitable in the early days or there is simply not enough of a profit to fund the growth. Therefore, you may opt to find a financing vehicle. The best time to apply for financing is when you do not need it. If your business is showing a profit and you can get by without taking out a loan, take out a loan anyway. You are far more likely to be approved by a bank if your business is making money, and a line of credit usually won’t cost you a penny if you do not draw from it.

However, you will have a credit line established for future use should the need for additional capital arise down the road. If you wait until your business takes a downturn before applying for a bank loan, you will need to do a lot of explaining and stand a good chance of being turned down. The same holds true for credit cards. Most credit cards have no fees associated with them as long as you have a zero balance. Applying for lots of credit cards may provide the capital needed to launch your business. But like a bank credit line, you will need to personally guarantee the repayment of any funds you take. If your business fails, you will still need to pay back the credit card companies and the banks, so be certain you understand this risk before jumping in. Be sure you are willing to do whatever it takes to build your business and be absolutely certain that you think your business will be successful.

You may also turn to your friends and family to see if they have money to invest. To me, this is very risky because if the business fails and you cannot pay them back, you may damage those relationships. If you speak to an angel investor or private investor, but sure you clearly understand the terms of the deal and make sure you are comfortable with them.

1. Secure financing when you do not need it
2. Apply for lots of credit cards
3. Get as many bank credit lines as you can
4. Be sure your business is on a path to be successful and profitable
5. Outside of friends and family, no one will give you money for free. Make sure you clearly know what the terms are.

By Paul Lewis

Do’s and Don’ts when meeting an investor

Okay, so your business is growing, you have a great opportunity that needs additional capital, and you have lined up a meeting with an investor. What are the do’s and don’ts of going into that first meeting?

I cannot stress enough how important it is to be prepared. The investor is interviewing you and if you do not know the answers the game is over. Know everything you can about your product, the competition, the opportunity, the market. Know exactly how much money you need and exactly what you are going to use it for. Talk in specifics. If you need $248,573, say so. Do not talk in ranges. If an investor hears, “I need between $200,000 and $300,000,” he will quickly come to the conclusion that you do not know what you need, your business is in trouble and you do not know how to turn it around. Don’t ask the investor how much he wants to invest.

Instead, tell him what you need. It is perfectly fine to ask if your needs are within his range, but stick to specifics. Also know precisely what you are willing to give in return, whether it is equity or an interest rate. Know your terms and make them clear. Most importantly, be 100% honest. If you are having difficulties, tell him. If you just lost a big account, tell him. The investor will learn the facts before making an investment, so don’t waste his time or your time. It is extremely important to state the facts and don’t paint a rosy picture. Being optimistic is fine, but don’t oversell the business or the concept. If the deal is meant to be, it will happen. It is funny to me how many times I see a desperate business owner that is about to lose everything if they do not get funded talking as if everything is perfect. Don’t hide anything. The investor will know immediately if he is being “sold” to and will end the meeting.

1. Be prepared
2. Know exactly how much you need and what the money will be used for
3. Know exactly what you are willing to give up in return for the investment
4. Be specific
5. Be 100% honest

1. Don’t lie
2. Don’t be desperate
3. Don’t ask the investor how much he wants to invest
4. Don’t paint a rosy picture
5. Don’t hide anything

Click ahead for how to negotiate the right deal with an investor!

By Paul Lewis

How do you negotiate the right deal with an investor?

The golden rule in negotiating a deal with an investor is that it should happen quickly. If you find that the negotiation is taking weeks or months, it is never going to happen. You must have a realistic view as to what your company is worth and the deal should stem from there. A very common mistake made by entrepreneurs is they think their business is worth far more than it actually is. Talk to an accountant and look for comparable businesses to understand the true value. When it comes time to negotiate, base the discussions on a realistic valuation and try to make the deal a win-win. If you are not 100% comfortable with the parameters, do not do the deal. If you have the slightest hesitation, move on to another investor and start over. And lastly, if you feel like you got a great deal, then something is horribly wrong.

1. If negotiations take a long time, the deal is not going to happen
2. Have a realistic valuation for your business
3. The deal must be win-win
4. If you think you are getting a great deal, something is horribly wrong

Questions? Comments? BigIdeaCES@CNBC.com