What an angel investor actually does

An angel investor puts their own money into a young private company in exchange for shares. That is the whole definition. There is no licence, no minimum and no office.

What separates a good angel from someone who has simply written a cheque is everything around that moment: how they found the company, what they checked, what they agreed and what they did afterwards.

Where the money sits

A company usually raises money in stages. Friends and family first, then angels, then venture capital funds if it grows fast enough to interest them. Angels arrive early, when there is a product, a few customers and a great deal still unproven.

That timing explains both the appeal and the danger. Shares are cheap because the company is fragile. Most early-stage companies fail, and when they do the shareholders usually get nothing back. Experienced angels expect a few investments to carry the rest, and they size each one so that losing it entirely does not hurt.

Two rules follow, and almost every experienced angel will repeat them:

• Only invest money you can afford to lose completely.
• Spread it across many companies over several years, not two or three in one.

What the work looks like

Finding companies. Good opportunities rarely arrive by advert. They come through other investors, founders you have backed before and communities where deals are shared and argued over. This is the main reason angels join groups.

Deciding. An angel reads the pitch, meets founders, tests the product and speaks to customers. They look at who owns what, how much money is left, and what this round is supposed to achieve. Then they ask the question that matters most at this stage: do I believe these people can do this?

Agreeing terms. The price is set by the valuation. If a company is valued at £2 million before the round and raises £500,000, the new investors own 20% afterwards. Beyond price, the documents set out what rights investors have: information, a say in major decisions, and protection if the company raises money later at a lower price.

Helping, within reason. Angels often bring more than money: an introduction, a first customer, an hour on a difficult decision. The best ones are useful when asked and quiet when not.

Waiting. An angel investment cannot be sold when you feel like it. There is no market for the shares. You are paid when the company is bought, lists on a stock exchange or, occasionally, buys you out. That can take seven to ten years. Many never get there.

How angels reduce the odds of a bad outcome

They cannot remove the risk. They can avoid the avoidable.

1. Invest alongside others. A group sees more, checks more and catches what one person misses.
2. Stay close to what you know. A builder judging a construction software company has an advantage a generalist does not.
3. Keep some back. Companies that do well raise again. Being able to invest in the next round protects your share of the winners.
4. Use the reliefs you are entitled to. Several countries offer tax relief for early-stage investment. In the UK the main schemes are SEIS and EIS. They soften losses. They do not turn a bad company into a good investment.
5. Write down why. A paragraph on why you invested, kept and reread, is the cheapest education available.

Who it suits

Angel investing suits people with spare capital, patience and some working knowledge of how companies are built. It does not suit anyone who needs the money back on a date, or who would lose sleep watching a holding go to nothing.

It is also not the only way to own part of a private company. Buying an established small business outright is a different activity, with profit from the first month and risks of its own. Many members of the Republic do one, the other or both.

If you are new, start by watching. Sit in on deal discussions. See how experienced investors take a pitch apart. The first skill is not picking winners. It is learning what a careful "no" sounds like.