What is an angel investment? Definition and FAQs

Published Tuesday 16 September 2025

Table of contents

• What is angel investment?
• How does angel investment work?
• Who are angel investors?
• Benefits of angel funding
• Three disadvantages of angel funding
• Choosing the right angel
• Making the deal
• Get your business investment-ready
• FAQs on angel investment

Key takeaways

• Prioritise angel investors who have experience in your industry, as they can provide valuable mentorship and better understand your business potential beyond just providing capital.
• Prepare thoroughly for the investment process by clearly defining how much funding you need and why, while being transparent about any business challenges during presentations.
• Conduct comprehensive due diligence on potential angels by checking their track record, references, and past investments to ensure they align with your business goals and working style.
• Protect your interests during negotiations by seeking professional legal and financial advice on contracts and terms, only giving away the equity percentage necessary to secure the funding and expertise you need.

What is angel investment?

An angel investor is a person who provides funding for a small business or startup, usually in exchange for an ownership stake. Unlike a bank loan, this money doesn’t typically need to be paid back. Instead, your investor shares in your business’s future success. They often bring valuable experience and mentorship, making them more than just a source of cash.

How does angel investment work?

Most new businesses struggle with the same challenge: securing adequate funding for growth. Angel investment has become an increasingly popular solution because it offers distinct advantages over traditional funding sources.

Angel investors differ from banks and venture capitalists in several key ways:

• make decisions faster because there are fewer approval layers
• invest their own money, not institutional funds
• give you direct access with less bureaucracy

Who are angel investors?

Angel investors are wealthy individuals who invest their personal money in businesses in exchange for equity; however, even non-’sophisticated’ investors can participate, though they may face limits such as not being able to invest more than $50,000 per year to qualify for certain tax incentives.

Key characteristics of angel investors:

• have experience as entrepreneurs, executives or professionals
• invest in businesses around the world, not just in major tech hubs
• focus on sectors they know well
• look for strong management teams, sometimes more than just a good business idea

Benefits of angel funding

Angel investment offers five key advantages over traditional business funding:

• make decisions quickly without institutional red tape or lengthy approval processes
• offer industry knowledge and mentorship along with funding
• provide personal commitment, since it’s their own money at stake — and in New Zealand, government incentives like a 20% non-refundable tax credit can further align their interests with yours
• provide funding as a lump sum so you can grow quickly
• let you keep control of your business, as most angels do not want board control

Three disadvantages of angel funding

Angel investment requires trade-offs – you’re exchanging business ownership for capital and expertise. Consider these potential disadvantages:

• give up a percentage of your business to the investor
• share some decision-making with your investor
• set clear expectations for growth and results

Choosing the right angel

Choose angel investors who know your industry. They can give you better advice and understand your business potential.

Essential due diligence steps:

• check their references and track record
• avoid investors who fund your direct competitors
• assess if you can work well together
• review their past investments
• confirm how involved they want to be
• check if they support businesses through challenges
• look at their network for future opportunities

Making the deal

Successful angel investment deals require thorough preparation and clear communication. Follow these essential steps:

Preparation phase:

• prepare your pitch and keep it clear and brief
• work out exactly how much funding you need and why

Presentation phase:

• be open about any challenges your business faces
• get ready to answer detailed questions

Negotiation phase:

• protect your interests and only give away what you need to
• get legal and financial advice on funding contracts and terms
• step back and make sure the deal feels right before you sign

Get your business investment-ready

Angel investment works best if you are open to sharing ownership in exchange for funding and advice. It is often a good fit for early stage innovation companies (ESICs), which usually have income under $200,000 and expenses under $1 million in the previous year. If you want to keep full ownership, consider other funding options.

Key advantages over traditional funding:

• enjoy a simpler process with less paperwork
• save money compared to high-interest loans
• get both funding and advice from experienced investors

Before proceeding, get professional legal and financial advice to ensure any deal serves your business interests.

Make the most of your angel partnership by using their expertise and industry connections. Most angels support their investments because your success helps them succeed too.

Want to get your business ready for investment? Try Xero for free to organise your financial records and create reports and insights that investors look for.

FAQs on angel investment

Here are common questions and answers small businesses may have about angel investors.

Is angel investment a good idea for my business?

It can be a great option if you’re looking for more than just money. Angel investors often provide mentorship and industry connections. However, you’ll have to give up some ownership of your business, so it’s important to weigh the benefits against the loss of equity.

How do angel investors get paid back?

Angel investors make money when the business they’ve invested in is sold or merges, and their returns can be significantly improved by favorable tax laws, such as a modified capital gains tax (CGT) treatment that may disregard gains on shares held for over a year.

What percentage of equity do angel investors typically want?

The final percentage depends on your business’s valuation, the amount of capital you need, and the level of risk involved.

How long does the angel investment process take?

The timeline can range from a few weeks to several months. It depends on how quickly you find the right investor, how detailed their checks are, and how complex the legal work is.