Angels are well-heeled individuals and families that invest in startup and early-stage projects that need capital. Angel investors are a well-known source of private equity, and they provide capital in return for equity stakes in the companies they invest in. Angels invest smaller amounts of capital compared to traditional venture capitalists, but Angels may also provide non-monetary value to the projects they get involved in. Angels often take an active role in the operations of a company, providing insight from their past experience and valuable introductions to other professionals by Sergio Gallego Basteri.
The term “Angel Investor” originated from investors in Broadway Plays who wanted to support and enhance the development of the arts. It is estimated that Angels invest up to 5 times more capital and also invest in 40 times more projects than traditional venture capitalists.
Demographics and Characteristics of a Typical Angel:
- 48 to 59-year-old male
- Sophisticated in financial matters
- Undergraduate and many have a graduate-level education
- Previous management experience
- Invest in 1 to 4 projects a year
- Expect a 20% plus return and to be involved for 2 to 7 years
- Self-made with a high net worth
- Invest alongside friends and family
- Feel a need to use their money and experience to promote entrepreneurship
- Like to be involved in the formative years of the companies they invest in
- Financially able to accept the risk of losing their entire investment in a project
- Have prior experiences and contacts that can be useful
- Enjoy putting thought into how to better any project they are invested in
- Find projects through friends, family, accountants, attorneys, and other business associates
- Invest $10,000 to a $1,000,000 or more per investment
- Like to invest in industries they are familiar with
- Many prefer to invest close to home
Where do you find Angels?
Everywhere, the key is to network, network, network, and then network some more. Be prepared to pitch your business plan to anyone, anytime, anywhere.
In conclusion, raising capital is hard work, and those entrepreneurs with perseverance are the ones who are rewarded. The best Angels have a track record of success, large rolodex’s and bring much more than capital to the projects that they get involved with.
Bridge and Mezzanine Financing
A general explanation of bridge financing is short-term interim financing used to solidify the capital structure of a company until more permanent financing is arranged. A general explanation of mezzanine financing is the layer of an entity’s capital structure between senior debt and equity. Many investment professionals view the last financing needed before a company goes public as a “true” bridge or mezzanine financing.
Both bridge and mezzanine financings are usually structured as subordinated debt along with nominally priced warrants entitling the holder to buy an equity stake or convertible debt. As a result, these types of financings have characteristics of both debt and equity. These instruments are considered to have more risk than senior debt but less risk than straight equity, and for that reason, the expected return falls in between the two.
This type of financing is very flexible. These instruments can be structured in many different ways to accommodate the specific needs of both the company (borrower) and the investor (lender).
- It was usually subordinated to senior debt.
- Usually higher interest rate than a senior (non subordinated) bank loan
- It is usually structured with an interest-only coupon with principal repaid at maturity.
- Usually, these instruments have a shorter-term maturity than senior debt.
- These financings are usually considered to have more risk than senior debt but less risk than straight equity, and as a result, the returns are expected to fall in between the two.
- Many times this type of funding is structured as convertible debt or debt with an equity kicker (nominally priced warrants for a small equity stake in addition to the interest rate)
- The structure may be tied to certain financial parameters that the company is expected to meet. It is common for an anti-dilution provision known as a “ratchet” to be included and states that the amount and price of the warrants or conversion price will vary depending on the ability of the company to meet certain projections.
- Management’s personal assets, as well as company assets, may be at risk in the case of default. Consequently, concessions that normally would not be acceptable to management may be tolerated when negotiating for the next financing that “takes out” these types of instruments.
In conclusion, these types of financing instruments are highly flexible and usually share characteristics of both debt and equity. Lenders will usually have extremely harsh remedies available to them if a company is unable to meet its obligations under these types of financings. As with any financing, competent legal and other advisors should be involved.
Secondary offerings are additional security offerings to the public after a company has become publicly traded. Secondary offerings are used to raise additional capital and are based on the current market value of the existing publicly traded shares. In essence, a company sells a further percentage of the company to the public by issuing more shares. When a company is offering additional, never before issued securities, it is considered a “primary distribution,” and the capital raised goes directly to the issuing company.
A secondary offering may also offer previously issued stock of existing shareholders to the public. When previously issued stock is sold through a secondary offering, it is termed a “secondary distribution,” and the capital raised goes directly to the selling shareholders, not the company.
The issuance of additional shares in a “primary distribution” is dilutive to the existing shareholders, whereas in a “secondary distribution,” shares only change hands, and therefore secondary distributions are not dilutive. In many cases, a secondary offering will encompass both the offering of additional shares of the company (primary distribution) and also offer shares of previously issued stock owned by existing shareholders (secondary distribution).
Advantages of Secondary offerings:
- Allows capital to be raised in stages and when needed
- Allows capital to be raised based on current publicly traded valuations
- Capital may be raised at higher valuations lessening dilution.
Disadvantages of Secondary Offerings:
- Offering newly issued shares is dilutive to existing shareholders.
- Many times underwriters will have to price a secondary offering at a discount to the current publicly traded price per share to entice demand.
- Secondaries increase the supply of the issuers stock available to the public and, therefore, may hurt the appreciation potential of the companies stock.
In conclusion, secondary offerings allow public companies to raise capital by offering additional shares to the public. If all goes well, secondary offerings will be done at higher valuations when compared to previous offerings and therefore lessen the dilution to existing shareholders. Many successful public companies are constantly looking at new opportunities and utilize secondary offerings as a way to fund growth opportunities.