When companies get incorporated, they receive funds to operate from the founders. However, the founders may have limited resources. Therefore, they cannot continue to provide more finance to support a company’s operations. As the company grows, its need for more funds will also increase. If the founders cannot meet those demands, they must seek parties that can help.
One of the primary features of companies as a business structure is the issuance of shares. Companies can issue these instruments to various parties. By doing so, companies can fund their operations through external finance. Therefore, they don’t have to rely on existing shareholders only to obtain finance. However, getting new investors to acquire those shares can be challenging.
For startups, in particular, this process can be competitive. Many companies in the market compete to obtain the same finance. On top of that, investors may be skeptical of providing funds to those companies. However, companies can still raise capital from some parties or processes. These may include angel investors and seed fundings. Both of these can be crucial in providing companies with funds for operations.
What is an Angel Investor?
An angel investor is an affluent individual who provides finance to small companies and startups. These individuals, also known as private investors, help companies get funds for initial operations. Usually, they come from entrepreneurial backgrounds. Angel investors may be external parties or within family and friends. The funds provided by angel investors usually include one-time investments to get businesses to initiate operations.
In some cases, angel investors may also provide continuous funding. Companies can use these funds to support their operations or during challenging situations. In exchange for their finance, angel investors get shares or convertible bonds. Angel investors do not seek established companies or businesses. Instead, they identify smaller companies with high business potential. However, they are more lenient with their fundings.
Angel investors may also be companies or institutions that invest in startups. Usually, they play an active role in the underlying company’s management. The purpose is to protect their investments and help owners build a sustainable company. In some cases, angel investors may also fund their pools. Using these funds, they can act as an angel investor. Either way, they can be critical for companies.
Angel investors provide funds to startups in various ways. Usually, they offer the company a loan convertible into equity positions. This form comes in the form of convertible debts. Similarly, angel investors may provide funds through convertible preferred stock options. This way, they become a member of the company’s board. Lastly, angel investors may also invest in equity positions directly.
Overall, angel investors are individuals or institutions that provide funds to startups. These parties allow startups to finance their initial operations. Usually, angel investors seek companies that have high growth potential. This way, they can increase their investments when the company takes off. Angel investors may also participate in a company’s decision-making process. However, some may also be passive.
What is a Seed Investor?
A seed investor is a party that provides funds to companies in their initial stages. The term used to describe those funds is seed finance or seed capital. Usually, seed investors provide finance to a company in exchange for equity instruments. In other words, they get equity interest in the company in exchange for their finance. Usually, seed finance is less formal compared to other finance sources.
Usually, any finance received through investors in the formation of a startup falls under seed capital. In most cases, the investors receive an equity interest in the company. However, they may also require to receive a share in the profits of a product. In most cases, seed capital comes from individuals close to the company’s founders. Therefore, it may include family, friends, and other relatives.
Seed funding is the crucial type of funds that startups require to grow. In essence, it is the first of the four stages to help startups create a sustainable business. This finance can also help companies perform crucial operations for the future. Similarly, seed funds may come from various individuals or institutions. One of these also includes angel investors that are crucial to the process.
Seed capital also gets its name since companies raise it during their initial stages. Usually, it includes small amounts that are enough to help operational needs. Therefore, it doesn’t need to be significant amounts. In most cases, this capital only covers essential costs and expenses. For example, it may include rent, equipment, payroll, research, and development, etc.
Seed finance may include various types, namely Series A, Series B, and Series C fundings. With Series A fundings, investors provide finance to companies with growth potential. On top of that, they must also illustrate a strong strategy to make money. Series B funding, in contrast, helps companies grow beyond the initial development stage. Lastly, Series C fundings come when companies have already established themselves.
Overall, a seed investor is a party that provides finance to companies in their initial stages. This finance helps companies cover their operational expenses. However, seed finance does not last forever. Instead, it enables companies to attract more financing. Nonetheless, it can be crucial in allowing companies to grow during the initial time. Seed investors may also include angel investors.
Angel investor Vs Seed investor: What are the differences?
Angel investors provide seed money through loans or equity. This finance helps companies grow their operations while also helping with operations. Since most angel investors offer finance in the initial stages, they also fall under seed investors. Usually, angel investors include affluent individuals, also known as high-net-worth individuals (HNWI). These individuals come from the personal network of the startup’s founders.
Apart from the differences, angel investors and seed investors can also have similarities. Both parties provide funds in the initial stages of a company’s operations. As mentioned, most angel investors also fall under seed capital due to the definition. Both parties also provide finance based on their relationship with the founders. Usually, companies do not repay these funds to the investors.
Angel investors usually play an active role in the management of a company. Usually, they do so to protect their investments. Similarly, angel investors can help companies grow through their contributions. They play a role in helping develop companies from scratch. Angel investors may also provide significant or moderate sums of finance. This finance comes as a loan or equity.
On the other hand, seed investors typically provide smaller sums of money. Like angel investors, seed money comes from people the startup’s founders know. However, they may not be highly affluent people. On top of that, seed investors do not usually participate in a company’s active management. In contrast, angel investors are experienced entrepreneurs. Their finance is also significantly higher than seed investors.
Another difference between both parties is the different stages of fundings. Usually, angel investors provide funds in a single round. As mentioned, some may also inject continuous finance into the startup. However, seed funds include various stages. As mentioned, it may come in three forms, including Series A, Series B, and Series C fundings. The process for angel investors is also shorter compared to seed funds.
Conclusion
Angel investors and seed investors provide finance to startups during the initial stages. Both parties may include the startup founder’s friends and families. However, they differ from each other in various aspects. The process for both types of finance differs. On top of that, angel investors may participate in the startup’s management. On the other hand, seed finance may come in several stages.
