Angel investor is a high net-worth individual who invests their personal finances. Usually invest in early-stage (angel, pre-seed rounds). Invest less $, the most often alone, sometimes syndicated with other angels (very rare).
Venture Capital funds are Professionals who invest money for someone else. Invest in later stages and invest more $ (depends on strategy).
The most popular method is funding new projects by a debt financing type. By a Convertible Note / Convertible Loan or by a US practice based on SAFE (Simple Agreement of Future Equity). The same method is used by both: Angels (the main form of investment) and Venture Capitals (bridge loan)
Pros: Easy and cheap; No valuation needed. Cons: No shareholders’ rights; Overusing might block the next financing. Use to cover operating costs of the Company specified in the Business plan in terms conditions agreed between a) Lender = Investor, b) Borrower – Company (not the Founders). A usual Carriers interest (5-10%), CAP / Discount. It is a debt = has to be repaid upon maturity or converted into security.
Convertible Debt (Conversion)
Convertible debt maturity is usually triggered by the next qualified financing round, Maturity date, Change of control or a serious violation of the Loan Agreement.
Convertible Debt (Formula)
Share = (investment/valuation)* 100%
Share = What angel investor gets
Investment = amount provided by Angel investor plus any accrued interest
Valuation = Amount of new investor values the Company at in a subsequent financing round (pre/post)
Convertible Debt (Discount & CAP)
Discount – Valuation a new investor the Company at in a subsequent financig round Multiplied by 0,7 / 0,8 / 0,9
CAP – Valutation a new investor valued the company at in a subsequent financing round. IF more than X -> Valuation = X
Angel round: loan $1 million, no interest
Next round: new investor values company at $40 millions
- No discount, no cap -> angel gets 2,5% (1/40)
- Discount 20% -> angel gets 3,1% (1/32)
- Cap ($10M) -> angel gets 10% (1/10)