Who are angel investors? How do they work out with start ups?

I have started a small software firm. Of course we need some funding. That's where I heard about angel investors. I would like know about angel investors and how start-ups normally work with them. What is the benefit for both start ups and investors? Thank you.

What is an angel investor?

• An angel investor is almost always a wealthy individual investing his or her own money in new startups (as opposed to managing a large fund of money on behalf of an institution).
• Almost all angel investors made their money by selling their own startup successfully.
• Angel investors almost always invest smaller amounts. These days in the USA technology world, typical angel investments are from $25,000 to $250,000.
• Angel investors sometimes invest as a part of a syndicate. In this case a startup finds a handful of angels who wish to invest and they each chip in a small amount. The total amount raised could be as high as $1 or even $2 million and you might have five to ten separate angel investors.
• Angel investors are usually the first money invested in the company after the founder's investment. Sometimes there are "seed" investors who invest as little as $10,000 even before the Angel round.
• Angel investors usually require far less paperwork than traditional VCs. In most cases they will use standard boilerplate forms for the investment.
• Angel investors usually make up their mind very, very quickly and rarely need to meet with the company more than once to make an investment decision.
• Angel investors do not expect a seat on the board of directors.
• In many cases angel investors will not require "information rights," that is, you will not necessarily be obliged to inform them of the progress of your business.
• Angel investors typically receive a percentage of the equity in the business (ownership). The amount they receive is entirely subject to negotiation and market prices. There are other, more esoteric ways they might invest (for example, they might give the company a loan which can be converted to stock at a later stage).
• The best angel investors will help their startups, usually by making introductions to potential customers, investors, or employees.

How do I find an angel investor?

• You should already know them. Angel investors rely very heavily on word of mouth, reputation, and introductions from their trusted advisors. If you don't already know a bunch of angel investors, approaching them at random is unlikely to be productive.
• There are a few large networks designed to help you find them, such as Open Angel Forum or Angel List.
• There are "incubator" programs for startups, the most prestigious being Y Combinator and TechStars. Joining one of these programs, if you can get in (they're harder than Harvard to get into), gets you three months of living expenses, a network of advisors and mentors, and the opportunity to demo your startup to an audience of hundreds of angel investors at the end of the program.

What is the benefit to a startup?

• Angel investors provide a friendly source of early funding without giving up much control of your company.

What is the benefit to the angel investor?

• They end up owning a part of your company. They are investing in a wide variety of companies in hopes that some of them may be huge successes.
• Many of them just love startups and want to help.

Fayaz, I have learned quite a bit reading on this topic and one writer that I would suggest you familiarize yourself with is Paul Graham. Here is one of his essays on the very topic of Funding a Startup:

http://www.paulgraham.com/startupfunding.html

The answer to your questions above, plus a list of many successful angel investors can be found at http://angel.co/ Good luck!