An angel investor and a silent partner may look similar to a layman, but they are actually two different categories of business partners. Their roles may overlap in one or two places, but the differences between them are wide and serious.
In certain cases, you may require the help of a lawyer to understand the difference between the two and to draw up appropriate legal documents regarding the two.
But in this guide, you will understand the difference between an angel investor and a silent partner. They are both partners to a business organization, but their roles and expectations differ, and this is what we will cover in this comprehensive guide.
Who Is An Angel Investor?
An angel investor is an individual or organization that provides initial or subsequent capital to a business organization with the expectation of future profits. An angel investor is also known as a silent investor in some quarters, and they do not get involved with the daily operations of the company beyond providing capital.
Sometimes, an angel investor provides capital to a business with the expectation that the capital will be returned at a future period with additional interest or profit; meaning that the capital is given as a loan which must be paid back with profits. And at other times, the capital is not meant to be paid back but must yield profits that must be paid back monthly or yearly.
The investor does not provide advice or give directions or interfere with the operations of the company. He stays aloof and watches from a distance, only expecting a profit when it is declared. However, while the angel investor may lose his investment in the event of business loss or bankruptcy, he will not be expected to inherit the debts of the company in any way. He makes money when the business makes money, but doesn’t pay debts when the company runs into debts.
Who Is A Silent Partner?
A silent partner is also like an angel investor in that they both provide capital to the business – but that is where the similarity ends. Apart from providing capital, the silent investor also participates in the daily operations of the organization. The silent partner may provide feedback or operational directions, and he may provide technical support as may be needed for the progress and profitability of the business.
The silent partner may provide business capital if he has it, and he may provide technical support in return for partnership in the business. This partner will help the company to grow by acting as a surety for bank loans, providing expertise knowledge, providing physical assets such as buildings and facilities, as well as orchestrating external connections with third parties to boost the business activities.
The silent partner also bears legal responsibility for the operations of the business. He does not only earn profits from the business, he bears the debts of the business when they occur. He will be responsible if litigation occurs with another company, meaning he will bear the brunt if the business is sued before the law courts. And if the company liquidates, the silent partner will be responsible for paying back some of the liabilities.
How To Work With Angel Investors And Silent Partners
If you plan to attract angel investors or silent partners into your business, be careful of how you proceed. If all you desire is to have more capital invested into your business for expansion or kickoff, you may be interested in an angel investor. But if you want capital and an authority figure that can leverage on his connections to attract loans, suppliers, subcontractors, and major customers, then you would have to get a silent partner.
Before you bring any one of them aboard, be certain to iron out the three following areas:
Explain The Risks
Do not be tempted to deceive potential partners with an exaggerated profits outlay obtainable in the business. Every investment carries some level of risk, and investors should not be allowed to invest more than they are willing to lose. Explain the potential losses and how they can be prevented before a partner commits his money to your business.
Just like the above, you must manage the expectations of potential investors before they commit their money to your business. Your business may have great potential for wealth and growth in major markets, but risks still lurk around the corner. Do not get potential investors too excited about the possibility of hitting gold with your business – curtail their expectations.
Get everything in writing – do not leave anything to chance or imagination – even if your best friends are investing in your business. A legal agreement or contract must be drawn up, setting out arbitration or litigation procedures to resolve major crises.
You can get a lawyer to draw up your contract and it must be enforceable in the courts. This will give the angel investor and silent partner peace of mind that their hind parts are covered if things go wrong.
So there you have the major differences between an angel investor and a silent partner. See your lawyer if you need to flesh out the intricacies of their roles and expectations if you attract them to your business.