Should I Seek Out Angel Investors?

Does it make sense to get angels to invest in my business? I don't plan to do an IPO or selling. So how do I provide for liquidity or return for the angels without these mechanisms?

Angel investors -- successful business executives, engineers or other professionals who have an interest in investing in businesses -- can add value to your business through their individual expertise or through their network of connections. In addition to cash, a good angel investor can provide meaningful introductions to sources of financing, credit or vendor relationships, even help you hire new executives.

As with any type of investor, however, never accept an equity investment without having a reasonable plan of how you will provide a return on that investment. While angel investors typically enjoy helping a company grow in a more hands-on way than the average investor, don't lose sight of the fact that their primary motivation is a return on their investment. And it's not enough for your company just to become profitable. You need to be ultimately able to provide a cash return on investment within a five- to seven-year time frame.

A cash or "liquid" return is usually achieved by selling the business or taking the business public and allowing an investor to sell their shares to someone else through the public markets or through a repurchase agreement. Sometimes there is a redemption agreement to buy out the shareholders.

What if you don't want to sell the business or take it public? Where can you find financing for your business? A business that's not going to go public or be available for sale down the road can borrow money or arrange enhanced credit financing from either banks or credit-enhanced facilities such as SBA loans. Banks can also arrange credit with strategic partners and vendors who may have a reason to want to help you succeed beyond a return on their investment. Your business success may help the partners' or vendors' business success, as in the case of someone who will be a principal supplier to your business. Special payment terms such as 60-, 90- or even 120-day allowances for payment are sometimes available if your business looks like it may become a major customer.

Bottom line: Before you accept money from any type of investor -- angel or otherwise -- you must have a shared understanding as to how they expect to get a return on their investment.