Understanding the Four Types of Angel Investments

This post originally appeared on the Louisiana Technology Park blog.

Knowing the difference between a Simple Agreement for Equity (SAFE) and a Keep It Simple Security (KISS) may make the difference between getting your startup off the ground or failing to launch.

Founders should understand angel investing terminology as they seek to raise money beyond themselves, family and friends. Capital from angel investors can help early-stage companies breakthrough, but only if founders grasp now their decisions will affect future rounds of funding.

The Red Stick Angel Network asked Ted W. Jones, a partner at the Jones Walker law firm in Baton Rouge, to explain how founders can harness the power of angel investing during a recent webinar.

Why Early-Stage Companies Need Angel Investing

Angel investing exists for one reason – most early-stage companies are small or too young to access public capital markets. Startups lack tangible assets, earnings and revenue to secure conventional bank financing or credit lines. This financial situation also makes startups difficult for capital markets to value.

“These companies get their initial financing from their founders, friends, families – the three f’s – but at some point, the bootstrapping isn’t possible anymore and financing dries up. It’s tapped out,” Jones said. “So the angel community enters the picture to provide broader and greater financing.”

The growth of venture capital has led to a concurrent rise in angel investing. Fifteen years ago, venture capitalists used to fund deals between $500,000 to $4 million in size, Jones noted. Now, most venture capital firms want bigger deals, upwards of $7 million or more, leaving a gap for angel investors to fill.

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