1. Introduction

The concept of Angel Investing and Crowdfunding in venture capital financing are separate ways of raising capital often for start up businesses. This article aims at providing an understanding of both concepts, the advantages, disadvantages and the possible things to look out for when considering any of them for a financing option. 

2. Understanding the concept of Business Angels and Crowdfunding

2.1 The Concept of Business Angels

Business Angel investors, often simply referred to as ‘Angels or Angel Investors’ are high net-worth, non-institutional, private equity investors who have the desire and sufficiently high net worth to enable them invest part of their assets in entrepreneurial ventures in return for a share of voting, income and ultimately, capital gain.

 Angel investors normally invest in the first round of early-stage businesses or ventures where the founders have exhausted their personal savings and sources of funding from family and friends. 

Angel investing in early-stage Private Companies is typically termed “a high-risk investing” and is undertaken by individuals who can afford to lose the money or wait some years before benefitting from any return.

Examples of Angel Investors include:

• Successful founders and business owners;
• High Executive Individuals;
• high-net-worth professionals.

2.2 The Operation Model of Angel Investors 

  In angel investing, Startups target raising funds from individual investors in exchange for equity, SAFEs or convertible notes.

A SAFE is a Simple Agreement for Future Equity. This is a legal agreement used by Startups to raise money from investors in exchange for the right to receive Company shares (equity) at a later date (usually during a future funding round).

Angel investors typically provide:

• High amounts of capital; 
• Mentorship; 
• Introductions to customers;
• Business opportunities;
• Strategic business advice.

3. The concept of Crowdfunding

 Crowdfunding is the practice of funding a Project, Business or Venture by raising small amounts of money from a large number of people via online platforms. 

Traditionally, Startups raise capital through Venture Capital (VC) Firms, but the number of Startups that receive VC investment is limited. Crowdfunding provides Startups with an alternative source of funding. However, the typical funding amount through crowdfunding is often limited.

2.4 Types of Crowdfunding 

Crowdfunding can be presented through various forms:

• Reward- based Crowdfunding

Startups use the Reward-Based Crowdfunding mechanism to raise money from the public by offering rewards or perks instead of equity or repayment. Contributors or Crowdfunders do not become equity holders of the Company.

Money is contributed in exchange for: 

• Early access to a product; 
• Exclusive rewards;
• Community participation.

•  Equity crowdfunding (ECF)

Here, Investors or Crowdfunders receive actual ownership in the Startup. In UK, the venture capital market is relatively small, compared to the US, and there has been some difficulties in financing early stages of entrepreneurship. 

 Dating back to the period 2008-2010, ECF first emerged as a digital financial innovation during the banking crisis; where banks reduced financing for small business and exacerbated the funding gap. After that period, the UK has been a leader in exploiting existing regulations to permit and support ECF as a way of raising capital for entrepreneurs.

Investors provide money in exchange for:

• Shares;
• Ownership stakes; 
• Future financial returns.

• Debt Crowdfunding

Debt-Based Crowdfunding, often also referred to as “peer-to-peer lending or P2P “is one of the easiest ways to raise funds through crowdfunding. This model operates through raising capital by taking loans from several investors (lenders) who expect to be repaid with an added interest over the period that the loan was “used”. The entire process takes place through a crowdfunding platform.

With Debt Crowdfunding, the online platform conducts a background check and due diligence of the Company and its shareholders to prove credibility.

The Company’s APR is also determined (Annual Percentage Rate) of the loan payment. This depends on the nature of the business, the experience of the shareholders and the overall risk involved in the business being successful.

 Depending on the target amount for the loan and the type of business, the platform may also suggest and/or require the Company to provide some form of security, which can either be a personal guarantee or a business asset. Once this is complete, the platform promotes the Company or venture to investors through its online channels. However, we note that, this is very risky.

1. The Advantages and Disadvantages of Angel Investing and Crowdfunding

• Advantages of Angel Investors and Crowdfunding

ADVANTAGES
Angel Investors	Crowdfunding
Angel investors are high net worth individuals and entrepreneurs with the ability to inject extremely high amounts of funding or capital that enables startups to accelerate growth.	In Reward-Based Crowdfunding, Founders can retain their ownership and full equity stakes thus, allowing them to control their business without external influence.
Many Angel Investors bring experience, expertise and business opportunities during the investment phase. Their guidance can help Startups navigate complex challenges and make strategic decisions.	Creation of visibility and authenticity after a well executed crowdfunding campaign. This becomes a gateway for the entry of other potential investors.
Securing funding from respected and high net worth Angel Investors can enhance a startup’s credibility, attracting further investments and partnerships.	Crowdfunding serves as a testing ground for market demand. As startups collect feedback during the campaign process, products and services can be refined and better aligned to fit the proposed market structure and expectations.
Angel Investment allows a business to raise capital without making any public offering.	This is ideal for creative projects and innovative ideas.

• Disadvantages of Angel Investing and Crowdfunding

DISADVANTAGES
Angel Investors	Crowdfunding
Angel investors receive ownership equity or shares in the Company in exchange for their capital.	Crowdfunding campaigns usually requires disclosure of the business idea or product to the public. This exposes the idea to high risks such as idea theft.
Angel Investors engage in high-level due diligence processes that can be invasive and time-consuming.	There is little or no guarantee of the business being successful in meeting its funding goal.
Angel Investors often require presentation of an exit strategy. This may include sale of the business.	Equity-Based Crowdfunding requires ownership dilution.
Angel Investors are exposed to high risks and may encounter total loss of their investment if the startup fails.	Difficulty for a business or a product to be seen in a crowdfunding pool.
Angel investors are highly selective in their funding phase thus a challenge for businesses to secure their investment.	Crowdfunding exposes the business to risk of fraud and delivery

2. Choosing Between Angel Investors and Crowdfunding

The choice between Crowdfunding and Angel Investing or Angel Investors is strategically tied to the priorities and circumstances surrounding the initial startup stage of the business.

Founders who value retaining control might prefer crowdfunding, as it allows them to maintain their equity stake. However, Founders who opt for business mentorship and substantial funding could gear up towards Angel Investors.

3. The Role of OL & PARTNERS in an Angel Investor or Crowdfunding Stage 

At OL & PARTNERS we play an important role in both crowdfunding and angel investing by helping startups and investors handle the legal, regulatory, and contractual aspects of raising capital. Our Private Equity Experts accompany you during this process by:

• Structuring the Investment: We advise on using either equity financing, SAFE Agreements and convertible notes; as this affects ownership dilution, investor rights and future fundraising.

• Legal Drafting and Review of Legal Documents: We advice and take off the burden by preparing or reviewing term sheets, shareholder agreements, subscription agreements, cap table documentation amongst others. These documents define investment amounts, valuation, investor rights, exit rights and terms, voting powers.

• Negotiate terms: We protect the rights of founders and Startup owners by negotiating terms to prevent harmful clauses such as: excessive investor control, unfair liquidation preferences.

• Due Diligence Support: We assist Startups prepare for investors by reviewing company registration records, intellectual property ownership, employment contracts, compliance records and licence acquisition. This prevents any hidden legal liabilities that may affect any potential investment in the Company.