An angel investor is a wealthy individual who financially supports early-stage businesses or startups in exchange for ownership equity or convertible debt. These are typically high-net-worth individuals who invest their money in startups, often taking on a mentorship or advisory role to help the business succeed. Angel investors can fund companies that are too risky or early for traditional financing options, such as bank loans or venture capital. They may invest in various industries and sectors and often seek to invest in companies that align with their interests or expertise. In this blog, you'll learn who qualifies as an angel, how to find them, and more.
To learn other ways to fund your business, check out my article How to Raise Money for your Business afterward.
How did they come up with the term angel investor? The application "angel" originally came from Broadway Theatre, where it described wealthy individuals who provided money for productions that otherwise would have been shut down. Similar to Broadway Theatre, startups carry an equivalent level of acute risk. That's why William Wetzel, a University of New Hampshire professor, coined the term angel investor after studying how entrepreneurs raised seed capital at his Center for Venture Research.
Who qualifies as an angel investor?
An individual qualifies as an angel investor if they meet any of the following accredited investor requirements based on wealth or measures of financial sophistication set by the US Securities and Exchange Commission (SEC):
Wealth & income
- Net worth over $1 million, excluding the primary residence (individually or combined with a partner).
- Income over $200,000 (individually) or $300,000 (combined with a partner) in each of the prior two years.
- Directors, Executive Officers, or General Partners (GP) of the company selling the securities.
- Any "family client" of a "family office" that qualifies as an accredited investor.
- For investments in a private fund, "knowledgeable employees" of the fund.
How to find angel investors?
It's not apparent to most founders how to find angel investors, which is a massive problem for the ecosystem. This puts underrepresented groups without existing networks at a severe disadvantage, making it more challenging to raise capital. Here is how to find angel investors like an insider:
- Start your search by looking at friends, family, and work colleagues. If you're not sure they have enough money to qualify as an accredited investor, look for whether they have started a company or list themselves as an "investor" in their social media profiles.
- Next, rely on "warm introductions" from your network. If your friends, family, or work colleagues do not invest, ask them if they know someone who does that they can introduce you to.
- After you've exhausted your network, see if any startup providers you're working with invest themselves or have relationships with angel investors. This may include your lawyer, accountant, banker, consultant, or representative from AWS, Hubspot, Pilot, Stripe, etc.
- Find the right investors and the strongest introductions to those investors on Signal, a free tool made by the venture capital firm NFX. You can segment their database of investors by location, stage, and industry.
- Submit your pitch deck to Seed Checks to get in front of 16 professional investors who write individual angel checks between $100K - $3 million, including Sarah Guo (Founder of Conviction), Immad Akhund (Founder of Mercury), Ryan Hoover (Founder of Product Hunt), Hunter Walk (Partner at Homebrew), Cindi Bi (General Partner at CapitalX), and Arielle Zuckerberg (General Partner at Long Journey Ventures).
- Apply to Mercury Raise to showcase your business to their angel investor network. They've worked with 630+ startups from 32 countries that have received over $1.7B in funding from the initiative. They have four programs to raise capital: First Check, Seed, Series A, and Direct to Consumer (DTC).
- Source angels from public LPs on each AngelList Syndicate page. These are qualified angel investors who may be interested in investing directly in your company. For example, if you scroll down you can see the LPs in Rob Ness' syndicate.
- Outreach to the 250+ active angel investor groups in the United States who invest collectively in early-stage businesses.
- Contact people with angel investing experience on LinkedIn. You can find people under the employees for the Angel Investor company page, and searching the term will bring up more people.
- Search for "best angel investors," "female angel investors," "helpful angel investors," and other variations on Twitter to see who turns up.
Who are the top startup angel investors?
- Elad Gil: ex-VP at Twitter. Notable investments include Airbnb, Airtable, Coinbase, Deel, Figma, Flexport, Gusto, Instacart, Navan, Notion, Opendoor, PagerDuty, Pinterest, Rippling, Samsara, Square, and Stripe.
- Scott Belsky: CSO at Adobe. Notable investments include Pinterest, Uber, Flexport, Sweetgreen, Airtable, and Carta.
- Balaji Srinivasan: ex-CTO at Coinbase. Notable investments include Cameo, Lambda School, Roam Research, Superhuman, Opensea, and Replit.
- Julia DeWahl: ex-Director of Starlink Business Operations at SpaceX. Notable investments include Varda, Hadrian, Faire, On Deck, Levels, Commsor, Culdesac, Modern Fertility, Royal, Airgarage, and Circle.
- Sam Altman: CEO at OpenAI. Notable investments include Optimizely, PlanGrid, Gusto, Le Tote, Vicarious, Nervana, Cruise, Instacart, Quora, Reddit, Asana, Titan, Boom Supersonic, and Neuralink.
- Naval Ravikant: ex-Founder and CEO of AngelList. Notable investments include Alt, Cover, Eight Sleep, Pipe, Metafy, Prologue, B12, and XMTP.
- Jason Calacanis: Host of the All-In podcast. Notable investments include Uber, Calm, Robinhood, Thumbtack, Density, Superhuman, Eight Sleep, Trello, Grin, and Desktop Metal.
- James Beshara: ex-Director of Product at Airbnb. Notable investments include Gusto, Mercury, Clubhouse, Alchemy, Liquid Death, Mindbloom, Bolt, Super Coffee, ThirdLove, RigUp, LTSE, IRL, Caliva, Triplebyte, ZeroDown, and Eden.
- Siqi Chen: ex-CEO at Sandbox VR. Notable investments include TouchOfModern, Slant, Amplitude, Italic, Clubhouse, and Amplitude.
- Esther Dyson: Director at BAMF Health. Notable investments include Zeel, Factual, AnchorFree, tbh, ToutApp, Syllable, JUMP Bikes, Swvl, and Turbine.
Who are the top small business angel investors?
- Mark Cuban: Owner of the Dallas Mavericks. Notable investments include Alyssa's Bakery, Magnolia Pictures, Earth Brands, Joy Milk Tea, Foodguides, Mad Rabbit, Numilk, and BizToc.
- Barbara Corcoran: CEO of Barbara Corcoran Inc. Notable investments include HireSanta, The Doughbar, Fidgetland, Press Waffle Co., Ski-Z, Cousins Maine Lobster, Grace & Lace, Bee Free Honee, Raising Wild Swimwear, Daisy Cakes, Pork Barrel BBQ, and Q-Flex.
- Alex Rodriguez: ex-MLB player. Notable investments include DSW, Blue Crow, Niyama Sol, Super Coffee, Professional Fighters League (PFL), UFC Gym, TruFusion, Step, and eMerge Americas.
- Shaquille O'Neal: ex-NBA legend. Notable investments include franchises (Papa John's, 24 Hour Fitness, Five Guys, Krispy Kreme, and car washes), CityPlex12 movie theatre, NRG Esports, and Authentic Brands Group.
- Draymond John: ex-Founder of Fubu. Notable investments include Bombas, Mission Belt, Bubba's Q, Sun-Staches, Mo's Bows, One Sole, Spikeball, and Sleeping Baby.
- Lori Greiner: ex-Founder of For Your Ease Only. Notable investments include Scrub Daddy, Squatty Potty, EverlyWell, The Pizza Cupcake, Spark Charge, Fish Fixe, Nana Hats, The Baby Toon, and Hug Sleep.
- Robert Herjavec: Founder of Herjavec Group. Notable investments include Sand Cloud, Keen Home, Hungry Harvest, Tipsy Elves, Happy Feet, Nuts N More, Drain Stain, Adventure Hut, Butter Cloth, and Bad Birdie.
- Rohan Oza: Founder of CAVU Consumer Partners. Notable investments include Scrub Daddy, Bombas, Simple Sugars, CBD For Life, Bai Brands, One Bar, Vital Proteins, Once Upon A Farm, Oatly, Thrive Market, Whoop, Farmer's Dog, and Nulo.
- Magic Johnson: NBA Hall-of-Famer and Lakers great. Notable investments include Starco Brands, SonicEnergy, Fanatics, Skydio, Naturade, Simwim Sports, Uncle Bud's, ShotTracker, Uncharted Power, Jopwell, and franchises (Starbucks, 24 Hour Fitness, and Burger King).
- Kevin Harrington: Owner of Harrington Enterprises. Notable investments include A Perfect Pear, Element Bars, Nubrella, Body Jac, Aldo Orta Jewelry, Fridge Fronts, Classroom Jams, Uroclub, Moku Foods, SpongeBath, and GrapeStars.
What percentage do angel investors take?
Typically, angels invest between $5,000 - $150,000 per deal and target 1-5% in the company. However, the percentage of equity that an angel takes in a startup can vary widely and depends on many factors, including the startup stage, the amount of investment, the valuation of the company, and the negotiating skills of the parties involved.
How do angel investors get paid?
Traditionally, angels get paid out when the company has a liquidity event, such as an IPO or acquisition. This means their money is locked up in the startup for 5-15 years. Because the timeline is so long, some angels have started negotiating for one-off terms that allow them to get money back on their investment sooner. For example, for a startup hyperscaling, there is now a secondary market where investors can sell their shares for a premium to other investors who want to buy into the company at that price. Additionally, some angels ask to be paid back in dividends when the startup becomes profitable. Be careful when negotiating terms around how angels get paid since these alternative payback paths may create conflicts of interest with your business. Good angels will want you to re-invest profits into the company to fuel growth and will support you for the long haul.
Angel investors vs. venture capitalists (VCs)
There are several differences between angels and VCs. In this section, I'll share the important ones and give you examples so that you understand the implications it may have on your business if you decide to raise from one type of investor and not the other.
Whose money gets invested: Angels invest their own money, while VCs invest other people's money. However, to align incentives, partners at venture capital firms often must invest personal capital into each fund they invest from to have significant skin in the game, similar to that of an angel. The commitment varies by firm, but it usually is 1% of the fund. For example, a venture firm is raising $100M and has two partners. Each partner must contribute $500K of their money to the fund.
How they make investment decisions: The best venture capital firms move quickly, but on average, angel investors can make faster decisions because they have fewer stakeholders and no bureaucracy or processes they must follow. For example, a VC firm may require you to meet with multiple members before reviewing your investment opportunity and voting. As a result, it may take a few weeks to receive money from a VC, whereas it may take one meeting to get money from an angel.
Average check size: The average check size from an angel is smaller than a VC firm. Angels typically invest between $5,000 - $150,000 per deal. VCs usually invest based on the fund size. The way that fund economics works is that each investment needs to be significant enough to return the entire fund. Venture investing follows a power law – you may have one or two true winners that return the fund and all the profits to the limited partners, and the rest of the startups will go to zero. Generally speaking, the larger the fund, the larger the average check size will need to be so that the firm can secure enough ownership in the business to return the fund. So, depending on the fund size and stage of the business, VCs may invest anywhere from $50,000 - $1 billion+.
Rights and control: VCs expect more rights and control over a company than an angel. Pay attention to this when raising money because these rights may have long-term implications for your business. Some of the specific rights that a VC may negotiate for include:
- Board seats: VCs typically require a board seat as a condition of their investment at the Series A round and every subsequent round. This gives them a seat at the table and, more importantly, one vote for crucial company decisions such as hiring and firing directors, approvals of future financing rounds, and more. As a rule of thumb, give up board seats sparingly. You want people you trust who will do what's best for the company and those who will vote with you in the case of a boardroom coup to protect you from being ousted from your own company.
- Liquidation preferences: VCs often negotiate for liquidation preferences, which allow them to be paid back before other investors and shareholders in the event of a sale or liquidation of the company. The most common liquidation preferences are a 1x multiple and standard priority stack. Investors with a 1x multiple get their entire investment back before others lower in the priority stack receive their payouts. A standard priority stack means liquidation preferences are paid out in order from the most recent investors to the earliest investor. So, an investor in your Series D round would get paid out before any of your Series C investors. Liquidation preferences can help VCs recoup their money before other shareholders and cap their downside.
- Protective provisions: VCs often negotiate for protective provisions to veto or block specific corporate actions, such as changing the amount of authorized common or preferred stock.
- Information rights: While it's best practice to update all of your investors as they can help you and your business succeed, VCs may expect more information to decide to invest and, after that, in quarterly updates.
- Pro rata: VCs often negotiate pro rata, allowing them to invest in future financing rounds to maintain their initial percentage in the company. This prevents them from getting diluted in future rounds by other investors.
Expectations: One difference that is very important and needs more discussion is the difference in expectations between angels and VCs. For starters, angels often invest for different reasons than VCs. For example, angels may invest out of an emotional connection with the founder or to pay it forward to future generations of entrepreneurs. In contrast, VCs invest for returns and profits because they are married to their limited partners. In addition, VCs tend to push their companies to grow as quickly as possible because VCs use company markups (paper valuations from future financings) and returns to raise subsequent funds. A venture fund timeline is typically ten years, so you may get advice from a VC to accelerate your growth, hiring, and more to match that timeline, even if it may be the wrong advice for your business.
Here are some additional resources that can provide more information on angel investors and how to find them:
- Visit the AngelList Data Center to see reports on the state of the US early-stage venture market and startups. You can see activity levels by industry, average valuations, funding to female founders, predictions from investors, and more.
- Visit the Carta Data Desk to see research on valuations, fundraising dilution, and more.
- Read the Signature Block by Ryan Hoover and others where they talk about angel investing.
- Follow Elizabeth Yin on Twitter. She tweets about angel investing, shares deals that she is investing in, and more.
- Scan publications like Forbes and Inc. to see the latest information they are putting out on angel investing.
- Listen to the Stonks Angel Investing podcast. Stonks interviews notable angel investors to learn more about their stories related to certain things going on in the market. I liked Episode 17 – Helen Min – From AngelList to Angel Investing & Why The Best Product Doesn't Always Win.
- Listen to the Wannabe Angels podcast. They interview experienced angel investors about their investment thesis, market predictions, and more. It's a relatively new podcast, but both hosts, Colin Gardiner and Harry Campbell have startup and investing experience and the networks to get good guests on the show.