There are several types of early-stage private equity available for business entrepreneurs. Other than your personal funds, there are the following sources:
(1) Angels are wealthy individuals who invest in the early-stage of start-up companies. The benefit of using angels for early-stage financing is that it is less complicated and generally requires less expense than venture capital financing. However, there are downsides to using angels. Often these individuals can only provide a one-time investment, which may require a greater number of investors to provide all of the needed financing and create an administrative burden. Also, many times angels are not sophisticated investors and may have unrealistic expectations regarding the return on the investment. When financing is obtained from angels it is important for the entrepreneur to ensure that the angel is an “accredited investor” under securities laws.
(2) Venture capital is a fund of pooled investments that is managed by a venture capitalist. It generally becomes involved in the early stage of a company with the intent of growing the business, where a return on its investment will be realized through an eventual IPO or trade sale. The benefits of venture capital are that the funds generally have enough resources to provide much of the company’s needed financing, and many venture capitalists can also provide assistance with general business issues, including formulating a business strategy, recruiting, and providing introductions into the business community. However, the downside of using venture capital is that it requires shared equity, and many venture capitalists insist on also sharing control of the company (usually through representation on the board of directors). This financing is generally not available to smaller start-up companies, as the venture capital funds generally desire to make investments upwards of $500,000 to $1,000,000. ()