Forums: Discussions for entrepreneurs and small business.

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

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.

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.

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.

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?

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.   

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.

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.

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.