Angel investors are individual investors who often invest in emerging entrepreneurs or small startups. Investment provided by an angel investor can be in the form of a onetime cash infusion, or it can be a regular stream of funds to help new a business venture get off the ground.

What sets this type of investor apart from other lenders is the favorability of terms.

While banks, venture capital investors, and other startup investors are betting on future profitability by investing in business viability, angel investors are often investing in the entrepreneur. This subtle shift means that the criteria angel investors use to qualify and evaluate investment opportunities will be different from those criteria used by other types of investors.

The focus for angel investors is not necessarily to profit from future business success, but to give a new business the means to succeed.

Related: What is an IPO?

How Angel Investment Works

Angel investors almost always use their own money.

Investments may be pooled through angel networks, handled in person, or submitted via crowdfunding sites. Not just anyone can become an angel. The SEC (Securities Exchange Commission) lays out minimum standards for accredited investors. A minimum net worth of $1 million with an annual income of at least $200,000 produces a barrier to entry that limits access to angel investment to the modestly wealthy and above.

Despite the fact that angel investments are typically sourced from an individual’s personal assets directly, in many cases the actual funding entity is an LLC, a trust, an investment fund, or another investment vehicle.

Related: What is free cash flow?

Other Terms for Angel Investor

The term “angel” refers to the fact that this type of investor is like a guardian angel for a new business. For a struggling startup, a much-needed cash infusion early on can be a miracle and can ensure later success once an entrepreneur is out of the roughest parts of starting their business.

Angel investors are known by many names: informal investors, angel funders, private investors, seed investors or business angels. All of these terms describe the same type of person: an independently wealthy person who invests in emerging businesses in exchange for ownership equity or convertible debt.

Related: How to calculate market share.

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