As you may know, you cannot issue any kind of securities (stock or debt) for your company without complying with the Securities Act of 1933. (However, there are some exceptions that allow you to sell restricted securities to friends and family without too many limitations.) In order to grow, you may still need investment even after you've tapped out all the funding you can get from friends and family. Your next best bet for that additional (and larger) infusion of capital will most likely be an angel investor.
Before we continue, let’s try to recall that you can legally sell restricted securities to angel investors, because, according to Devin Thorpe, they get the exception from the Securities Act for accredited investors. These are people who can fulfill one of the following requirements:
"I) Have had an individual annual income of $200,000 for the past two years with an expectation that it will continue;
II) Have had a household annual income of $300,000 for the past two years with an expectation that it will continue;
III) Have a net worth of at least $1 million, excluding a primary residence."
Well, unless you are from a wealthy family it will be difficult for you to get access to these individuals on your own – especially seeing that most prefer to remain anonymous. Thankfully, George Deeb recently wrote an article outlining the various avenues you can take to reach out to Angel Investors.
1. Family and Friends
Guess what? Some of us do have friends and family who meet the accredited investor standard. But according to Deeb, given the very high probability of loss, you should “make sure your friends and family know this investment is HIGHLY risky, and they should not invest the funds unless they are prepared to lose 100% of their investment (e.g., like money they would gamble in a casino).”
2. Individual Angel Investors
According to Deeb, this is the hardest route and will require quite a bit of research on your part. Your options include:
a) Rich families with formal family investment offices. However, these tend to prefer to invest “$5MM+ in more typical venture investments not $500K in a startup”.
b) “Find an individual that understands your industry and business model”.
i) If they understand what you are doing (i.e. your business model) and can bring value to help you grow quickly, Deeb believes they will be more likely to invest. It’s up to you, however, to find out who these people are in your industry and how you can go about getting an introduction.
• Deeb gives a really good example of how you could go about doing this.
c) Use Angel List to find local Angel Investors. Again, Deeb recommends that you find credible people to help open the door for you.
3. Angel Investor Network
In these networks, “investors set aside funds for angel investments, screened by a professional team that sources deals for the network”. Deeb thinks this method might be best for you because:
a) “It is much easier for you to raise your full amount needed”; and
b) You only need to make one phone call.
Here is a list of Angel Networks throughout the country (sorted by region).
4. Use Fundraising Advisers
According to Deeb, you should use this only as a last resort (or if you are an introvert like me who naturally shies away from anything related to selling or pitching). Why? Because this approach is very expensive! If you decide to use these fundraising advisers, expect to pay:
“a 5%-7% success fee in cash, plus the same dollar amount in warrants to buy into the deal, and often times, plus a monthly retainer to cover their costs.”
Plus, they only accept clients that they believe they can easily sell to investor so you will still have to put some effort in your pitch.
I have to say, I think this is an amazingly comprehensive list of options for anyone needing that additional infusion of capital to get to the next level. So, I hope it will help you achieve some level of success. Good luck!
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