Paying Angel Investors

NormNorm subscriber Posts: 3
edited May 2007 in Startup Funding
Hi everyone:
OK, I`m considering pursuing angel investors to fund my business idea.  What I don`t fully understand is, how does the angel`s payout work? That is, how much is the "standard deal"? Does an angel expect an overall percentage on his investment? If yes, what is it? 50%? 100%? 200%?
Let`s say for argument`s sake that it`s 200%.  Let`s also say my investor invests $10,000.  That means when it`s all said and done, the investor should have $30,000 in his pocket.  So my question is, how does the investor get paid if I never go public and sell stock? Do we just agree, "Hey, if the business is profitable, you`ll triple your money in three years?"
I`d appreciate any explanations and/or ideas on this.
Norm

Comments

  • MNGrillGuyMNGrillGuy subscriber Posts: 2 Member
    You and your angel will need to negotiate what a reasonable future value of your buisness will be based on expected NI in that year.  Maybe 4 yrs from now.  Then, you and your angel will negotiate what % of the business should belong to the investor for his investment.  20%, 30%, 40%?
    Let`s say you value the business at $500K in 4 yrs, and you gave the investor 20%.  The investor is making 78% year over year on his $10K investment.  This would be appropriate for high risk start-up.
    Cashing out can be tricky.  Either buy the investor out or sell the company.
     
  • robertjrobertj Tampa Bay, Floridasubscriber Posts: 0 Member
    People who invest their own money in private companies as a business (I call them "professional angels") typically look for situations that will be attractive to the institutional investors (VC firms) in a future round and ultimately leading to a liquidity event (sometimes called exit) where all the investors get "cashed out".
    On the other hand, private investors (not the professional angels) may have different criteria for the investments they choose.
    In general, investors want an ROI (return on investment) that is commensurate with the risk - as they perceive it. Venture capital firms have a 5 year horizon and look for situations that are capable of producing returns that are multiples of their initial investment - from high single to low low double digit (6X-12X) at the liquidity event.  
    There are generalities - every situation is different. Contact me directly if you want to discuss yours.
     robertj2007-5-23 13:8:2
  • InactiveMemberInactiveMember subscriber Posts: 12
    Great advice all around. In my experience, angels want equity and the possibility of a high rate of return ... they`re looking for 5x or 10x.
  • NormNorm subscriber Posts: 3
    Thanks for all the info, everyone.  If I understand you correctly, 10x the investor`s original offer is more than fair? So I`d be saying, in effect, "For every dollar you invest, you can expect 10 in return?"
    And then I could then just ultimately buy them out in cash?
  • MNGrillGuyMNGrillGuy subscriber Posts: 2 Member
    The 10x is a specific result you might get, not somehitng that can be promised.  You crunch the most accurate numbers you have and estimate a future value.  How much of that value are you ready to give an investor for his contribution today? 
    That % will probably turn out to be 5x - 15x the original investment but you certainly would not guarantee it.  You work the BP to the best of your ability and try hit all of your projections.  Deals are for % ownership, not guaranteed multiples on investment.   
  • robertjrobertj Tampa Bay, Floridasubscriber Posts: 0 Member

    Thanks for all the info, everyone.  If I understand you correctly, 10x the investor`s original offer is more than fair? So I`d be saying, in effect, "For every dollar you invest, you can expect 10 in return?"
    And then I could then just ultimately buy them out in cash?

    One should be  VERY careful about promising specific returns to investors.
    I strongly suggest that you get some expert help before going forward. The dollars you "save" by doing it yourself can prove to be very costly in the future.
    You can contact me directly if you want to discuss your specifics.
  • 247Nurses247Nurses subscriber Posts: 1
    Where do you find Angel Investors and I have attempted three times thru someone that requires to have ROI and then I spent 3 to 4K and they declined but kept the money because of thier time to analyze my business plans and conversation thru email. I think that`s rip off.. Can you help?
  • robertjrobertj Tampa Bay, Floridasubscriber Posts: 0 Member
    247Nurses:
    I am sorry to hear about your experience.
    First of all, finding investors is part art and part science.
    Secondly, in early stage situations, the entrepreneur (founder, inventor) is key to acquiring capital and must be an integral part of the process.
    Contact me directly if you want to discuss the specifics of your situation.
  • cmaslankacmaslanka subscriber Posts: 0
    I work for a company called Frihet Holding LLC and we are angel investors. We do our investing slightly different then most. Our invesment strategy is to do a business valuation to see what the business is worth, then decide how much to invest into that company.
    For example, if we were to invest 200,000 in a company that is worth 1,000,000 we would own 20% of the company until it gets paid back. At the end of the contract we would get 20% of the companies net worth back. If the company grew to 1.5 million, then we would get 20% of the final growth of the company.
  • AdvisorGarageAdvisorGarage subscriber Posts: 10
    As for finding Angel investors - many people I know who have gone through the startup joy ride often find angels through friends of friends.  Its true that there are websites like GoBig Networks and ours (http://www.AdvisorGarage.com</A>) and people do use those routes - but as RobertJ says above "Its part art and part science" - my first stop would be to talk to friends and family to see if they know people that like to invest in early stage companies...ask for a personal referral, this should go along way towards getting an angel interested...the rest is up to you and your business. However, if you have pooled everyone you know and no joy...try the above sites, or a local chamber of commerce, or a alumni if you happen to have gone to college...
    Just a few disperate thoughts...hope they help.
     
  • robertjrobertj Tampa Bay, Floridasubscriber Posts: 0 Member
    Advisor Garage:
    I agree with your point about getting a referral or introduction. In fact, from our our experience and our client`s) about 75%  of all the investments in early stage companies comes from people within 2 degrees of the entrepreneur.
    However, I would also add that, while one can just ask everyone you know - it works better if you are prepared, have the right materials and use the "language" of capital.
     
  • mtradesmtrades subscriber Posts: 0
    You can offer investors promissory notes with a set interest rate payable back over a specified time frame or you may want to consider offering them revenue sharing in which case they will be entitled to a % of your companhy profits.
  • DeanUSADeanUSA subscriber Posts: 0


    Let's say I need a $500.000 investment in a start up company.
    I know that I can make my product and sell 5 of them bringing in $365.000  Now that's not profit but it would be the money I would be able to generate from the investors initial $500.000.  SO you can see that i can do vary well in this business. I don't want to give the house away to this investor and should I tell him that I can make this much money so fast? In what way should I pay this investor back? What if I want to buy him out in as little as 6 months, how much should the buy out be? This is in a industry that is already proven.m I am not trying to recreate the wheel. I am just going to do it in a much more cost saving way for the customer. This is how I will generate a lot of business vary fast. I will save the customer about 40%.  So Please advise me on all of the above.
    Regards,
    Dean
  • robertjrobertj Tampa Bay, Floridasubscriber Posts: 0 Member
    Dean,
    There are a number of ways to bring capital into a business. Investors who purchase equity are typically looking for a significant return on their investment because of the risk- as they perceive it. Generally, if the company is going to return the capital within a short (6 month) time period, the deal would be structured using some form of debt instrument. 
    However, commiting the company to sucha quick return of capital may hinder its future. Without more details I can't really offer any specific suggestions.
    If you would like to discuss your situation, feel free to drop me a PM or contact me directly.
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