My answer to What are the differences between VC, seed, angel, super-seed etc. funds and investors?
Answer by Raad Ahmed:
When it comes to investors, there’s a lot to choose from. It can get a bit overwhelming for startups that are totally new to the business game, but choosing the right option will not only better your chances of attracting the best investor for your operation, but may even help you avoid issues in the future.
Here’s a simple breakdown of a few types of investors:
- Angel investors—Simple to understand investors since these guys are wealthy individuals who like to to invest their personal funds in startups. Although it’s easy to explain what an angel investor is, their role can vary quite a bit. Some angels are happy with a percentage of return for their investment while others demand a portion of ownership in the company. It’s usually a more informal setup with these investors as they will likely make choices based on instinct and interest rather than analytics. This can be a great option for startups who may have a tough time getting any traction from other types of investors.
- VCs—This type of situation is different than an angel in that it is an organization of investors. Usually, this type of investor isn’t as interested in the early stages of a startup and prefers to see some return before they get involved. They like to make deals where they know they will get a return, so they can be turned off by too much risk. However, they are more likely to invest a larger sum of money, but typically require ownership and to be placed in a decision-making position.
- Personal Investors—Think friends and family here. These type of investors base their involvement more on their trust in the business owner rather than any type of trust in the business itself. Basically, these investors know you and like you. It’s still suggested to make it a professional setup that’s clearly defined by a contract.
- Banks— Good old fashioned bank lending is another investment option. Banks work just like investors in the way that they want to know what your business plan is and have some sort of proof that you’ve thought ahead to the challenges and problem-solving techniques should issues arise.
- Peer-to-Peer Lending—This option uses websites to link lenders and business owners together. From there, the two negotiate the terms and then the lender provides the funds. This is usually an individual (much like an angel), but the platform is a bit different since the lenders will bid on the businesses that interest them based on the businesses’ profile.
Once you’ve chosen the right investor for your situation, you’ll likely need contracts to ensure that things move along smoothly.an help. We connect clients with startup attorneys that can walk you through your options and explain the entire process. Check out our website to learn more about our affordable rates and flexible communication options.