Inside Secrets to Angel Investing, Chapter 5 Excerpt

When Is An Angel Investor Really A Bank?

In other chapters of this book, you have learned about the history of Angel Investing, the many types of Angel Investors, and the sources of capital different types of businesses in various stages should seek. This chapter covers the hybrid of private equity and debt. Every company as it grows into a large company will have a mix of cash, debt and equity. Evidence of the mix in a company’s capital infrastructure can be found on the balance sheet part of a company’s standard financial statement.

Balance Sheet Sample

Common belief is that debt comes from banks or institutional lenders and equity financing comes from private or institutional investors. In the full Chapter 5, you’ll learn that there are in fact, many ways that a private investor can provide capital in a debt vehicle, as if they are a bank, without the fiduciary restrictions of a bank.

Why Not a Bank?

The U.S. Federal government has tried to encourage the growth of small business for all the economic reasons described in Chapter 4, The Business Lifecycle:  And the Capital Plan. If a Start-up or Early-Stage company enters the business world with an expectation of “entitlement” for a loan guaranteed by the Federal government, it quickly realizes there are many requirements for obtaining capital in the form of debt, or otherwise. For example, the Small Business Association (SBA) guarantees 75% of the value of the loan that a commercial bank offers to the borrower, not as the eager entrepreneur might hope for, such as 75% of the loans applied for. The full Chapter 5, a number of reasons why an Early-Stage company may not want to use a bank are explained in detail. Also, you’ll learn more about the regulations which govern banking practices including a new law under consideration by the SEC referred to as “Regulation B.”

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What Kind of Debt Does An Angel Investor Provide?

Investors can provide funding to entrepreneurs as debt in the form of each of the following products which are defined here briefly, but described and discussed more fully in Chapter 5 of the book.

Promissory Note: Promissory notes are straight loan transactions and should have formal agreements that cover the basics of the agreement. Most investors who structure these types of loans ensure there is either personal collateral or an individual in the position to personally guarantee the note before actually lending.

Convertible Debt Loan:  Often referred to as Convertible Subordinated Debt, this is a loan, managed through a private placement investor memorandum, that usually includes terms such as interest payments, length of the term, and the option to trade in the loan for stock at a predetermined price.

Royalty Financing:  Royalty Financing is basically loaning money against the promise of a future sales. The lender collects a portion of the gross revenue on a monthly or quarterly basis until an agreed-upon total amount is paid back, usually 4 times the original loan amount.

Long-Term Debt with Warrants:  This type of loan essentially is a long term (2-7 years) loan with standard interest rates, and the bonus of the right to purchase stock sometime in the future at a predetermined price. Instead of converting an out-standing debt to stock, as in the Convertible Note, the investor may purchase shares after the loan is repaid at the predetermined price.

Bridge Note: A Bridge Note is an interim or short-term loan used between long-term financing, or prior to the obtaining of a usually larger debt or equity financing. Such bridge loans tend to be ‘hard money’ loans with high interest rates.

Mezzanine Financing: Mezzanine financing is usually provided by private investors or venture capital firms prior to a company going public or initiating its next stage of financing. Mezzanine Financing is considered short-term in that is intended to provide a surge of capital during the “quiet period” when a company is being scrutinized by the SEC.

Margin Loan:  Margin Loans are made by wealthy individuals who have substantial holdings of blue chip public stocks who desire to invest capital in an Entrepreneurial Endeavor but do not want to liquidate their holdings, usually because of the capital gain impact on their tax liability.

Why would an investor want to loan money rather than purchase stock? You’ll find the answer to this question discussed in the full Chapter 5.

Providing private debt to an Early-Stage or Start-up company is a good way to provide the company the capital needed to reach another milestone. This alternative form of debt is ideal in many ways for both the investor and the company. Since the valuation of the company grows as they reach different milestones, the warrants or options that the investor has as part of the loan package are worth more as the money is put to work and the company’s valuation and therefore stock value increases. Such convertibles drive up valuation for early investors.

Participation in a Royalty Financing fund, or directly negotiated as such, is a great way to create a recurring revenue stream, much as the recurring revenue stream created by rents from a real estate investments. There are very few of these in operation, but they are gaining momentum because of the desire by many sophisticated investors to have revenue streams rather than committed capital.

With Angel Investing, there are many ways to participate. We have covered the traditional equity purchase or trade in previous chapters. In the full Chapter 5, When Is An Angel Investor Really A Bank? we cover the concept that if your investment is made in the form of debt,  you can expect a return on that investment sooner than if you made a straight equity acquisition.

This is the final excerpt from “Inside Secrets to Angel Investing”.  We hope you have enjoyed the excerpts and other emails you have been receiving and find the information we have shared valuable.  If you have not yet purchased the book, “Inside Secrets to Angel Investing” there is a link below to do that.   And if you choose not to, we will still continue to send you information we believe is relevant and would be of value to you in your quest for knowledge about angel investing.  This will include current events and news, articles, and podcasts.

To learn more about how to buy “Inside Secrets to Angel Investing”, plus the 6 Bonuses that are included in your purchase, click here.


Karen Rands
Compassionate Capitalist
Managing Director of Kugarand Capital Holdings and subsidiaries
Membership Director for National Network of Angel Investors.

Please also join us on the internet.

About The Author

karen-rands-bioKaren Rands is the founder of Kugarand Capital Holdings, LLC ( For over a decade, she has taught entrepreneurs how to attract capital from investors and lenders, and high net worth men and women how to invest in early stage private companies. She has provided opportunities for qualified companies to meet and court qualified investors leading to the investment of over $35,000,000, growth of dozens of companies and the creation of hundreds of jobs. Through that she has interviewed, analyzed and observed and then applied that knowledge in ebooks, podcasts and blog reports. Now she is taking it to a whole new level by building a national network of investors that want be a part of the expected seismic shift in investment in the public markets to the private markets. High net worth men and women want their investments to be relevant and rewarding. Investing in an aspiring entrepreneur’s endeavor to help bring innovation to the market and create jobs, while creating wealth, just makes sense. It’s the win-win of investing. To learn more about Karen Rands, visit her bio page.

Disclaimer: Every effort has been made to accurately represent our products, their sources and their potential when applied by the student. Any information offered regarding actual earnings or examples of actual results can be verified upon request or the source can be made available. Purchasing equity in private companies is an extremely risky business. The information provided during the online orientation to Angel Investing is drawn from personal experience with Angel Investors and companies seeking funding, and from recognized authors and columnists, and is not intended to represent or guarantee that anyone will achieve the same or similar results. Each individual’s success depends on his or her background, dedication, desire and motivation. As with any business endeavor, there is an inherent risk of loss of capital and there is no guarantee that you will earn a return on your investment.

To learn more about how to buy Inside Secrets to Angel Investing, plus the 6 Bonuses that are included in your purchase, click here.


  • The Federal Reserve
  • The Securities Exchange Commission
  • Angel Investing; Matching Start-Up Funds with Start-Up Companies; Mark Van Osnabrugge and Robert J. Robinson, Harvard Business School, 2000
  • Attracting Capital from Angels; How their Money and Their Experience Can Help Build a Successful Company; Brian Hill and Dee Power; John Wiley & Sons, 2002
  • Where To Go When The Bank Says No; David R. Evanson, Bloomberg Press, 1998
  • Angel Financing, How To Find and Invest In Private Equity; Gerald Benjamin and Joel Margulis, John Wiley & Sons, 2000
  • Other public sources found on the Internet and experience gained through consulting with investors and entrepreneurs. Other references as listed within this document.

“Inside Secrets to Angel Investing” is copyright protected and the information held within this website and the derivative content of the electronic courses are the sole property of Kugarand Holdings, LLC. You may not distribute it for financial gain without express approval from Kugarand Holdings, LLC. You may use the online material for educational purposes and link this and the Kugarand Holdings website to your website if you do not modify any of the content or credits.

©2005 Karen Rands & Kugarand Capital Holdings, LLC