Home-Based Business Start-Up Financing: Angel Investors

Raising start-up capital may require giving up a portion of your business to private investors, called "angels." Such money is called equity capital. Equity financing means dividing your business ownership among investors who contribute capital but may or may not participate in the operation of the business. There aren't any loans associated with equity capital, and there isn't any legal obligation placed on you to pay back the amount invested. All the investor gets is a percentage of the business, and the losses or profits associated with it.

Equity capital may, at first glance, seem like the best way to raise start-up capital, but there are many drawbacks. First, you give up a portion of your business and, with it, some control. That means you have to share your profits with your new partners, and, depending on how you set up the company - partnership, limited partnership, or corporation - you could become responsible for the actions of your partner(s). If the partners go into debt, you and your company may also.

Second, with some types of equity financing, you might relinquish control of your company. Have your lawyer draw up documents for equity investors to sign, stating the amount and value of the equity being offered. The individual with the idea will usually retain 50% of the equity in the company; the other 50% will be sold to investors. While the 50-50 rule is fairly common, everything is negotiable in a deal such as this.

Private investors, referred to as "angels," are called the "invisible" segment of the financing industry because they are so difficult to find. For entrepreneurs who need help locating individuals who want to invest in new companies, here are some guidelines from William Wetzel, a leading expert on angel financing and professor of management at the University of New Hampshire in Durham:

• Start early. Finding investors takes longer than you think.
• Look close at home. Target investors who are within a half-day's drive from your business.
• Look for individuals who have a high net worth and a knowledge of your market or technology.
• Seek out wealthy individuals in philanthropic organizations, Chambers of Commerce, local advisory boards, and non-profit organizations. Investors are often involved in such organizations.
• Network, network, and network
• Have your business plan in order. Investors are very concerned about their return on investment and want to see evidence that you will provide it.
• Get references from professional contacts, such as lawyers and accountants. Being referred to an investor is always better than a cold contact.