Do You Have What it Takes to Become an Angel Investor?
Estimated reading time: 2 minutes
"Angel investor” is something of a buzzword—most of us have heard the term, but what does it mean? Angel investors provide early-stage capital for startups and entrepreneurs.
Who Angel Investors Are
Angel investors are typically high net-worth individuals with an interest in riskier investments. The cash they use to invest is their own, and angel investments usually make up less than 10% of their portfolio. Angel investors might make a one-time investment or multiple investments to get a new venture up and running, usually in exchange for partial equity or a stake in the business. Many angel investors also have accredited investor status, but it’s not a requirement.
Why Making Angel Investments Is Attractive
Becoming an angel investor in a budding business is in many ways a form of altruism. Angel investment supports economic growth. It often attracts successful and former business owners who want to give the next generation of entrepreneurs their shot at creating a thriving business. Some angels choose to assume a mentorship role within the company they invest in.
Making an angel investment saves startups and new businesses from seeking other often more predatory forms of funding with less favorable terms. Angel investors provide an estimated 90% of the outside equity raised by startups.
While these investments do have the potential for higher returns than most traditional investments, investing in startups is risky. 50% of startups fail in the first 5 years. The investments angels make are not loans, so should the business fail, they can’t expect to be repaid. It takes a minimum of 5 to 7 years to generate a return, so these are also not liquid investments.
Making angel investments with a Self-Directed IRA (SDIRA) has its perks. Angels who invest through Traditional SDIRAs can use pre-tax dollars to make their investment and avoid paying capital gains tax, which ranges from 15 to 20%. If the investment is successful, angels will either not have to pay any taxes on the investment (with a Roth IRA) or be able to defer them until retirement age.
Want to learn more about which businesses you can invest in? Check out our private placements page.