Types of Investors
Friends & Family
If available, friends and family are frequently used as initial investors, and are one of the most common types of investors for start-up companies. Friends and family can be an alternative to other types of investors because they typically require fewer restrictions and demands than outside investors, who are investing solely for the purpose of making money. Despite these investors being friends and family, all legal requirements must still be adhered to, including federal and state securities law compliance.
A growing number of start-ups are obtaining financing from angel investors, who are individuals or small groups who invest in start-ups. Angel investors are often former entrepreneurs or professionals and provide not only funding but valuable experience and advice to the company. Angel investors typically attach more strings to the governance of the company than friends and family investors but less than a venture capital firm. Also, they generally provide smaller amounts of capital to a larger number of start-ups than venture capital firms.
Venture Capital Firms
Venture capital firms tend to invest large sums of money into a small numbers of start-ups. Venture capital firms typically invest in the later stages of a start-up, once it has already experienced success and needs a large amount of funding to take a big step forward. Venture capital firms often require that they have a seat on the board of the company, and they sometimes place certain milestones and requirements on the companies they invest in. However, they do usually give the largest amounts of capital to individual companies.
A relatively new phenomenon, crowdfunding raises capital via small contributions by a large number of individuals, typically over the internet. Crowdfunding may be a valuable source of funding, especially if the start-up does not anticipate significantly increased capital needs in the future or seeking money from angel investors or venture capital firms in the future. In general, companies who raise capital via crowdfunding often have a difficult time obtaining financing from angel investors or venture capital firms down the line. However, this is an evolving area with new regulations. As with friends and family investments, all legal requirements must still be adhered to when crowdfunding, including federal and state securities law compliance.