Equity capital, unlike debt capital, is when someone or some company invests in a company in return for shares or stock in that company.
Angel investing is generally done as such an equity investment.
This money does NOT need to be paid back to the investor.
Rather, the investor generally gets paid when there is a liquidity event, which is the event through which the company "cashes out" such as being sold to another company or having an initial public offering or IPO.
Note that a liquidity event is also known as an "exit.
" Note, however, that in some angel investments, angel investors can be paid dividend payments or profit sharing over time, and sometimes angel investments are structured as convertible promissory notes.
Convertible promissory notes are loans with a fixed interest rate which, at maturity, can be redeemed for cash or shares of stock in a company.
So, in essence, they are loans that can be converted into equity.
As you might imagine, equity capital is much riskier to investors than debt capital.
As a result, angel investors expect to earn higher returns than they do with debt.
Specifically, angel investors generally expect to earn returns of approximately 30% from their private company portfolio.
Note however, that you cannot simply offer an angel investor the chance to earn a 30% average return on investment (ROI).
Why? Because most angel investments fail to reap any ROI.
As such, if half of their investments fail, they would need to earn 60% returns on those that succeeded to realize a 30% average return.