As an Angel Investor - How can I make money / exit

There are a lot of different scenarios that can play out here. There would presumably be some language in your investment agreement that explains what your options are in the event of a significant change in ownership of the company and what you are allowed to do with your ownership.

Probably the most common one is for the company to get bought by another company. If that sort of a deal happens and its mostly cash, then you might be able to receive cash equivalent to your percentage ownership.

Another scenario is that the company could receive some significant investment from another source who wants to buy out other investors. This is less likely, but certainly possible.

If allowed, you might be able to sell your ownership to other investors as well.

There are a lot of rules around what's allowed and how these things have to be handled. You should make sure you have an attorney who specializes in these types of things help out with any agreements you make.

Also, don't expect a quick return. If you ever do see a return on your money, it's likely that it won't be for a long, long time.

Just as an aside, I'd also recommend that you invest in a company where you can add some value outside of just giving them money. If you have some specific area of expertise or interest, see if you can find a company in that space that is a good fit. You'll help them as much with your advice as you do with your money.

What sort of investment are you thinking of making? Let me know how it works out.

Without knowing the details of your investment, you might want to read this paper:

Returns to the Angel Investor

It is a survey of over 500 angel investors in 86 groups and reports on actual returns on 1,137 exits.

At least you would have some hard data for comparison.

Good luck.

Mark

A common method is to use convertible warrants and/or a balloon loan.

The idea is that as an angel you're "loaning" the company money, but it doesn't have to be paid back at all for e.g. 3 years.

• If the company fails, you lose your money, but obviously that's the risk no matter what the method.
• If the company has good revenue but no stock exit, they pay back the loan (usually high interest because of the risk level) so the angel still make something back.
• If the company's stock becomes valuable (new round, being sold in whole or part), the angel participates with stock instead of the loan (that's the "convertible" part).

Agreed with Del that if you're just a cash machine, that's OK but you might as well put money on the roulette wheel. If you can add expertise, connections, advice, etc., then you're making it more likely they'll succeed, which should make your investment "safer."

As for exit, if your investment was indeed "A" round equity, you should expect to be in for the long haul. Typically, your shareholder agreement will describe whether or not you can sell your shares without first offering them back to the company. But do not expect any follow-on investor to cash you out. Prudent investors only want their money to be used as working capital, not for retiring debt or buying out early investors.

The exit you should expect is acquisition by another company, where, depending on exit valuation, you will either get your equivalent % of ownership (after future dilution by follow-on investment) in cash or stock, depending on how the deal was structured for all shareholders. On the dilution issue, don't let that bother you. Typically, if the company is growing and profitable, with that dilution from follow-on investment, you end up with a much smaller percentage of a much greater valuation than when you originally invested, usually with signifcant appreciation.

A word to the wise, if you haven't done this before and are not going to be involved (i.e., bring some advisory expertise to the company) think twice before you do it. My scenario is the 1 in 5, success one. In the other four outcomes, you can lose all of your money in, at least two of them.

Lonnie Sciambi