Term
Business angel
A private investor who puts their own money, and often experience and contacts, into an early-stage company in exchange for a stake. They come in earlier than venture capital funds and with smaller amounts.
Updated
What it means
A business angel is a private individual, most often a successful entrepreneur or manager, who invests their own money in early-stage companies. They come in at the earliest stage, when the company has neither revenue nor a track record and neither a bank nor a venture capital fund would finance it yet.
Besides money they bring experience, contacts and often a mentoring role, sometimes with a seat on the supervisory or advisory board. Investments typically range from tens to hundreds of thousands of euros, and angels often group into clubs and invest together.
In return they receive a stake in the company, usually a minority one, or a convertible loan that turns into equity in the next round. The terms are first summarised in a term sheet and then carried into the contracts.
How it works in practice
When an angel invests in an s. r. o., the company usually increases its registered capital and the investor subscribes a contribution. Because they pay more than the nominal value of the stake, the difference is booked as share premium in capital funds. It is not income of the company and is therefore not taxed.
The size of the stake follows from the agreed pre-money valuation and the amount invested, and the founders go through dilution. Before signing we prepare a cap table with all shareholders, options and convertible loans, so it is clear who will own what after later rounds too.
The angel’s rights, such as consent to key decisions, information rights, pre-emption and exit terms, belong in the shareholders’ agreement. The investor carries out due diligence before investing, so it pays to have the books, contracts and taxes in order before the first meeting.
What to watch out for
An angel is not just a source of money but a partner for years. Poorly designed rights, such as a veto on routine decisions or a disproportionately large stake for a small sum, can block the next round, because professional investors do not want to join a messy structure.
Money from an angel often arrives quickly and informally, sometimes before the contracts are signed. If it lands in the account without a contract, it is unclear whether it is a loan, a contribution or a gift, and each has different accounting and tax consequences. We therefore recommend accepting the money only on the basis of signed documents.
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