Holly founded ExitPromise.com as well as StartupPromise.com and so far has answered more than 3,000 questions asked by business owners about starting, growing and selling a business.
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Sourcing money for your startup often comes from angel investors or friends and family. These investors are early-stage investors who invest in startups often based solely on a relationship with the founder of the business. The angel investor may have been introduced to the founder by a mutual friend or colleague.
Angels, as well as friends and family, invest their own money which is unlike venture capitalists and private equity investors who manage pooled money from others. This distinction makes this form of startup capital much more personal and should warrant caution before accepting investment.
The initial source of funding for any startup is very risky for investors, regardless of where the money is sourced or how much investing experience an investor may or may not possess.
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Before investing, angel, friends and family investors will want to confirm the founder has established the following:
- Clear Vision and Passion: They want to see that the founder has a clear and compelling vision for the business and is passionate about pursuing it.
- Market Opportunity: Investors are interested in businesses that address a sizable and growing market opportunity. They want to know that there is also a strong demand for the product or service to be developed and offered.
- Founder’s Expertise: Investors often consider the founder’s expertise, experience, and ability to lead the company to success. The founder does not necessarily need to be the subject matter or technical expert if they can demonstrate business acumen. Angel Investors understand that once the business is initially funded, the founder will be able to build the team leaders which will include a subject matter expert, a technical expert, and at least one leader with strong business leadership skills.
- Business Plan: A well-thought-out business plan that outlines the company’s strategy, revenue model, and growth plans can be crucial in gaining angel, as well as friends and family investors’ confidence.
How Much Money Can I Raise From Angels or Friends and Family?
The investment amount from angel investors and friends and family can vary widely. Typically, friends and family may invest small amounts, often ranging from a few thousand to tens of thousands of dollars. Angel investors, who are more experienced and invest in startups as part of their portfolio, may invest anywhere from $25,000 to several million dollars.
Once an investment is made, investors expect the founders to work diligently to achieve the business plan’s milestones and objectives. Communication with investors is crucial, keeping them updated on the company’s progress, challenges, and any significant developments.
A business valuation is not always necessary, especially in the case of friends and family investments, as they may invest based purely on personal relationships and trust. However, when dealing with angel investors or more sophisticated investors, a valuation is often expected. This valuation helps determine the percentage of equity the investor will receive in exchange for their investment.
It’s not uncommon for angel investors to use Convertible Notes or a Simple Agreement for Future Equity (SAFE) contract which defers the need for a business valuation and takes much less time to put into place when raising startup capital.
How Much Equity Should Angels or Friends and Family Receive?
In either case, it’s wise to not agree to offer more than 10 to 20% of the company’s equity to angel or friends and family investors. If too much capital is given to early-stage investors, the founders may not have sufficient capital for future capital raises or to retain for their own stake in the company.
The term runway refers to the amount of time a company can operate before running out of cash, assuming no additional funding is subsequently received, and the business operating expenses continue at the current rate. Typically, the purpose of raising capital when working with friends and family investors is to launch the business so the cash runway may be relatively short when compared to the Pre-Seed, Seed, or Series A, B, C, etc. forms of startup capital sources. Angel investors typically fund startups from the initial stage through the Series A round and depending on the amount of their investment, may offer a cash runway of up to 18 months.
Overall, the terms of the investment, the investor’s expectations, and the specific requirements can vary significantly based on individual circumstances, relationships and agreements between the parties involved. It’s essential for both the founder and the investor to have a clear understanding of their roles, responsibilities, and timeline to meet the startup’s milestones to foster a successful long term partnership.
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