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What are early stage investors?

Early stage investors are usually angel (individual) investors who invest in a business and help scale it so that it is attractive to venture capital investment. Early stage investors are likely to be very involved in developing the business' strategic plan and creating a good management team.

Once you have early stage investors, the business becomes separate from the founders, and decisions are made on the best interest of the company only. This means that founders are often replaced because their skills are not what the business needs to grow.

Is your business ready for an equity investor?

Your business is ready for equity investment if
  • it can be scaled to a very large size
  • the founders are willing to reduce (or eliminate) their control in the company,
  • everyone agrees to a strategic plan which allows the company to be sold within 2 to 3 years.
Early stage investors are looking for companies that have created traction - which shows you have a good idea, you can get it ready for sale, and the market likes it. The investor's expertise will be to provide capital so that your business can be scaled and sold it to someone with lots of money. Legal requirements

You are not allowed to advertise ownership interests in your business or sell to people you do not know unless you have registered with the SEC (Securities and Exchange Commission). Registering with the SEC is a cumbersome process, and few non-public companies go through the process.

You can, however, sell an ownership interest to people who meet the SEC requirements for an "accredited investor" through a private placement. There are multiple ways that someone can be an accredited investor, but usually it means they have a net worth of $1 million at the time of purchase. Click here for complete information.

Private placement means that the sale was made to someone known to the financial intermediary or the seller; i.e. there was no advertising to the public at large.

Even if you use a private placement to an accredited investor, it is strongly suggested that you work with an attorney experienced in private placements.

The difference between angels and early stage venture investors

Angel investors are wealthy individuals who invest in businesses on a part-time basis. Early stage venture investors are professional investors who invest for a living.

  • Angels are willing to invest in people - they like the founder and the idea. Venture investors are looking for the highest chance of success and profit
  • Angels want to be part of the process of growing the business and are more open to how that is done. Venture investors want to use their professional, "proven" teams to grow the business quickly and then sell their interest.

How much equity should you give an investor?

Here is a simulation tool that helps you see the effects of having several investment rounds. Investment simulation tool

What is the investment process?

The most important contribution of early stage investors is their expertise, not their money. This is because they will be working with you to identify which business model and strategy will be most profitable and sustainable. So, you are looking for angel investors that have expertise in your industry. This involves a lot of networking and research. One way is to hire attorneys and accountants with expertise and connections in your industry and then ask them for contacts.

You are looking for one investor. That investor will open doors to others. So it is much better to carefully target who you talk to, rather than pitching your idea to lots of people hoping for a group to be interested.

For additional insight into attracting investors, consider reading these books:
Click here for books on angel, venture and other forms of business financing
Expectations of early stage investors

  • You will be open to their ideas and use their strategies.
  • Regular communication.
  • You will have full disclosure to the investors - both the good and bad.
  • Decisions are made on what is best for the business, not what is best for the owner or what has been done before.
  • Books and records will be properly kept.
  • Costs are kept to a minimum until the company reaches breakeven.
  • You agree to sell the company within a 2 to 3 year period.
Ongoing Responsibilities

  • Regular financial reporting to investors (quarterly)
Where to find early stage investors seeking business investments

Click here to go to Angel Investors in the Tools for Business.