4 August 2025 • 6 minute read
Friends and family round vs. angel round
Many entrepreneurs setting out to start a business assume they should focus venture capital funds for the company’s early-stage financing needs. That assumption, however, may be a misconception. In reality, venture capital comprises only a small percentage of startup financing. For most startups, there are two common sources of early-stage financing: friends and family and angel investors.
This article briefly describes the differences between these two common sources of early-stage financing for startups.
Friends and family round
In meeting their initial capital needs, founders typically obtain financing from their own savings and from their network of friends and family. Typically, these investors are individuals willing to invest anywhere between $10,000 and $150,000 of their personal finances because they have a personal connection with the founder, or are motivated by the founder’s startup idea. This type of early-stage financing is commonly referred to as a "friends and family" round.
The close personal connection that friends or family members have with a founder often makes them a convenient source of initial funding. Given this familiarity, entrepreneurs may be tempted to accept money from such investors without adhering to the corporate formalities that future institutional investors require. That could be problematic for the company. Even when funds come from those closest to the founder, entrepreneurs are encouraged to carefully document each investment by, among other things, entering into subscription or stock purchase agreements, updating the company’s capitalization table and executing the necessary board and/or stockholder approvals. Proper documentation may help avoid future negative consequences, ensure there is a proper foundation of good corporate governance for future investments, maintain organizational clarity, and reduce potential issues in future financing rounds.
Angel rounds
Angel investments are typically made either by small entities that are formed specifically to invest in startup companies or by wealthy individuals who may be entrepreneurs themselves or otherwise have significant experience investing in early-stage companies. Angel investors generally seek out companies that have moved beyond the earliest formation stages, and have, for example, already developed a product. Angel investors typically invest between $100,000 to $2 million. Unlike friends and family investors, angel investors may not have a personal relationship with the founders. They are motivated by a return on their investment and the opportunity to draw on their own knowledge to mentor or coach budding entrepreneurs.
Angel investments usually serve to bridge the gap between a friends and family round and a Series Seed or Series A round. Most entrepreneurs appreciate the benefits of an angel round because it can increase their startup's valuation before a financing round with institutional investors.
Key differences
This chart highlights the key differences between a friends and family round and an angel round.
| Friends and family round | Angel round |
| The investor usually has a personal connection with the founder, is not necessarily a high-net-worth individual, and may lack the industry knowledge required to objectively evaluate the startup’s structure, technology, opportunities or potential for growth. They are willing to invest anyway because of their personal relationship with the founder. | The investor is usually a high-net-worth individual who is accredited, and often participates as part of an angel network of repeat angel investors. They are typically equipped with industry knowledge to evaluate the startup and help it grow, often by serving as a director or advisory board member. |
| The average investment is around $23,000. | The average investment is around $75,000. |
| The startup’s valuation is typically between $500,000 and $1 million. | The startup’s valuation is typically between $1 million and $3 million, and requires that the board retain at least around 10% of the total equity. |
| These rounds tend to close more quickly, usually within two months, providing a speedier solution to the startup’s immediate financial needs. | These rounds generally take longer to close, usually between three and six months. If the investment is made through an angel group, the process can be even longer, because there is usually a more structured pitch and diligence process. |
| These often turn into a continuous, long-term financing opportunity because of the pre-existing relationship between the investor and founder. | These are usually not repetitive because angels tend to avoid making follow-on investments in the same company to prevent over-concentration in their portfolios. |
| Transaction costs are generally lower than in other rounds due to reduced transaction and legal fees, largely because of the limited due diligence and simpler documentation involved. | Transaction costs may be slightly higher, especially if done through an angel group. However, the benefits of industry knowledge and mentorship from angel investors can sometimes counterbalance the additional transaction costs. |
Throughout the various stages of a startup's lifecycle, different sources of financing may be available, each presenting unique challenges and considerations for entrepreneurs. When a business is brand new, friends and family rounds and angel rounds are common financing sources.
Not every startup will pursue a friends and family round or an angel round, but some may do both, and may even do so multiple times. Budding entrepreneurs should keep these options in mind as they consider how to best finance their company.