Home / Angel Investor Negotiations / What To Offer Angel Investors: Commission From Sales

what to offer angel investors: commission from sales

Angel Investors are not like your typical average investors. Angel investors are individuals who can financially afford risk their money in a business. To be an angel investor, one must be a ‘licensed investor’, which means that you need to have a net worth of at least $1 million or an annual salary of at least $200,000. Generally, an angel investor invests much less than $1 million in a start up or an early-stage organization.

An angel investor offers an additional value to the organization and much beyond the investment they provide. Many angel investors actually are in fact very successful business owners and entrepreneurs and these angel investors are the people who offer you and can bring you worthy industry experience, knowledge, creative thoughts and ideas and useful contacts.

Many times, the partnerships that form between the founders and angel investors are fruitful but, in a few cases, they have turned destructive. Organizations that should have succeeded have been stuck and held back by investor partnerships that have badly limited their potential to grow and rise and in some cases, lead them to failure.

Angel investors with a lot of money to invest in your business, is not a good enough reason for you to make your decision. You very well need to understand their intention and their basic motivations, as to what is driving them to act as an angel investor, to offer you the money you want. You also need to realize that all money for funding purpose is not the same. Some money will help you scale new heights while other investments can lower down your chances of creating the business you always imagined.

Angel investors generally make funding decisions about start-up companies without paying others to take care of their money. Thus, the ROI generally would not involve paying any mediators. This thing can make a start-up funding appealing than the alternative high-risk funding that generally involves paying a broker or another financial mediator. Saving about 1 to 2% each year in investment commissions, deals and fees can make a big difference in equating start-up funding to alternatives.

Mostly all the angel investors want a position in the board and sometimes a consulting role as well, in offer for the investment these angel investors make in a start-up company. All the angel investors also need good communication with the organization they fund in. For some angel investors it just means reviewing the quarterly reports, while for other angel investors that would mean keen involvement ands weekly updates.

For all the angel investors, in offer for the investment they make in a start-up organization or any other business, the return targets range from an internal rate of return of about say 30% over 5 years to sales projections of about around $20 million in the first 5 years to a possible return of 5 times the investment in the first 5 years. Most angel investors look for an offer of anything from say about a 5 to 25% stake in the firm. In offer for the high risk investments they make, some angel investors want securities –common or preferred stock with specific rights and liquidation preferences over common stock. Some angel investors even ask for convertible debt or redeemable preferred stock in offer for their investment funding they provide, but this also puts the organization at the risk of repaying the funding along with the interest.

Generally, the amount, which is the percent of ownership given to the angel investor, in offer for the investment he makes, is calculated as ‘investment/post-money valuation’. The pre-money valuation is the value of the organization today, while the post-money valuation is the pre-money valuation with the funding amount.

When angel investors decide to invest in a firm, they generally expect company equity in exchange for the investment they provide or in simple terms, angel investors expect some return in the exchange for the capital and advice they offer you. This can be in the form of a promissory note which would be converted into a firms’ equity position in the organization after the new business officially opens. Generally, the angel investor gets about 15-30% equity in the firm they invest in and this is more than enough to be an important member of the firm’s board. Mostly, when you approach an angel investor for funding and if he’s interested, an angel investor normally would demand about 20% more equity than what you might offer to give.

Many times angel investors desire a percentage of the commission from the sales or deals from your business, in which they invest their capital in. That is one of the ways of getting returns for an angel investor in offer for the investment he makes in the entrepreneurs business. Say, for e.g. you want to start a restaurant business and you meet up with the angel investor and convince him to lend you the funds you need for your business set up, then one of the ways the angel investor might want to earn his return could be that he asks for a percentage of commission from you on the sales you make, running your restaurant, on a monthly, quarterly or a yearly basis. The percentage of the commission the angel investor could ask in offer for his investment capital depends on the amount or the percentage of capital he is investing in your business. It depends from one angel investor to the other.

When you have successfully managed to convince the angel investor to fund your start-up business or an idea, you need to sit down and carefully understand the “terms and conditions” clause. The angel investors have a great amount of saying in the “terms and conditions” cause they are the one’s who will be investing a great amount in your business and that is a high risk investment offer that they do. Even then, you need to be comfortable with the terms and conditions that have been put forth and only then should you move forward with the business. If you have any doubts about any clause, make sure you understand it fully before proceeding any further.

Thus agree on the terms clause if you are satisfied, because you do not want to be unhappy about doing your business in the end.