Who qualifies as an accredited investor? In other words, what is an accredited investor, and why does it matter for your startup?
Accredited investor status differentiates them from those that are not accredited to participate in certain types of investments, and at what level. It also makes all the difference in who you can market your investment opportunities to, and how.
Understanding who qualifies as an accredited investor is vital for staying out of legal and financial trouble, finding the right investors for your startup, and conducting appropriate campaigns.
Here’s what you need to know about who qualifies as an accredited investor. As well as some of the alternative sources of funding for your venture.
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. Why Does It Matter?
- 2. What Is An Accredited Investor?
- 3. What Are Non- Accredited Investors?
- 4. Startup Fundraising: Accredited Vs. Non-Accredited Investors
- 5.Types Of Accredited Investors For Funding Your Startup
- 6. How To Pitch Accredited Investors To Fund Your Startup
- 7. Other Financing Sources For Your Capital Stack
- 8. Summary
Why Does It Matter?
There are at least six reasons why understanding accredited investors and how they differ is vital as an entrepreneur and startup founder.
- Staying Safe: Avoiding lawsuits, SEC investigations, and financial penalties
- Qualifying Them: Knowing how to qualify accredited investors and verify it
- Who You Can Raise From: The investors you can solicit and accept funds from
- The Process: How are you allowed to market or secure investors for your startup
- Limitations: Knowing limits on how much can be invested, and shares sold or traded
- Position: How these fit into the financial stack for your startup
See How I Can Help You With Your Fundraising Efforts
- Fundraising Process : get guidance from A to Z.
- Materials : our team creates epic pitch decks and financial models
- Investor Access : connect with the right investors for your business and close them
What Is An Accredited Investor?
Who qualifies as an accredited investor?
Both individuals and legal entities can be accredited investors. For individuals, the qualification is either:
- A net worth of over $1M, not counting any personal residence (either individually, or with a spouse or partner)
- An annual income of over $200k in each of the previous two years, with reasonable expectations for the same for this current year, or $300k with a spouse or partner
Holding certain securities licenses, being executives or officers of a company selling securities, clients of a qualifying family office, or knowledgeable employees of a private fund can qualify individual professionals as accredited investors as well.
Entities are also qualified as accredited investors. Per the SEC website, the following criteria apply for entities to qualify as accredited investors:
- Legal entities that have more than $5M in investments
- Employee benefit plans, 501c3 charities, LLCs, trusts, family offices and clients, partnerships, and corporations with more than $5M in assets
- An entity in which all equity owners are accredited investors
- Exempt of registered investment advisors, or broker-dealers
- Financial companies, such as banks, insurance companies, investment companies, saving and loan associations, and business development companies
What Are Non- Accredited Investors?
Unaccredited investors are those that do not qualify as accredited investors according to the above criteria.
Generally, those that are not credentialed finance professionals, are not high-income earners, or high net-worth individuals and couples.
This does not mean that unaccredited investors cannot become investors or participate in your business venture, but there are rules on engaging with them, what you must provide them, how much they may invest in your company, what they can do with their shares, and when.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Startup Fundraising: Accredited Vs. Non-Accredited Investors
Aside from the qualifications already listed above, what are the differences in raising money and getting investments for your startup between nonaccredited versus accredited investors?
Let’s take a look at some of the pros and cons for the average startup company. Remember that each venture is unique, and you may have your own perspective on these factors as well.
The Pros Of Raising From Accredited Investors
- Fewer rules and limitations
- Less management with fewer but more sophisticated investors
- Larger amounts can be raised from each investor
- Investors may bring more value in terms of resources, experience, and contacts
The Pros Of Raising From Non-Accredited Investors
- Ability to engage consumers as backers and brand ambassadors
- Far more investors to reach in this pool
- Less competition for their investment
- Gaining visibility at a high level
The Cons Of Raising From Accredited Investors
- Obligation to verify and qualify them
- A smaller investor pool
- More competition for investors’ money
The Cons Of Raising From Non-Accredited Investors
- More upfront legal costs for fillings
- A higher burden of disclosure and content creation
- More management intensive
Types Of Accredited Investors For Funding Your Startup
Common types of accredited investors that you may include in your fundraising campaigns include:
- High-net-worth individuals
- High-income earning individuals and couples
- Finance professionals
- Angel investors
- Angel groups
- Family offices and their clients
- Venture capital firms
- Private equity funds
- Insurance companies
- Other investment funds
- B2B customers with substantial assets
How To Pitch Accredited Investors To Fund Your Startup
The exact types of accredited investors you may pitch for funding your startup will vary by stage, round, industry, and more. Yet, the steps involved are really the same.
Learning to run a good, efficient fundraising process, with replicable results will make all the difference for your company, the mission, and the ability to reach your big vision.
Learn Your Ideal & Target Investors
The first step, before anything else, is to get clarity on exactly who your target investors in this round are going to be.
This means giving serious thought to who your ideal investors are. As well as who is willing and able to fund your business right now.
Key questions to ask in this process include:
- Who has the amount of money I need to raise in this round?
- Who is focused on funding startups at our stage of business?
- Who is excited about funding this type of product, and company, in this market?
- Who shares our vision and values?
- Which investors are able and actively investing in line with our timeline for closing this round?
- What additional value should investors bring in terms of resources, expertise, and contacts?
- Where can I reach these investors?
- What is most important to them in
- Which investors are likely to provide the type of funding and terms we are looking for?
Use this process to begin creating an investor avatar, and shortlisting the investors you will pitch in this round. The answers to these questions will help you figure out who qualifies as an accredited investor.
Get Introductions & Build Relationships
The next step in raising money from accredited and even non-accredited investors is to connect with them and begin building, strengthening, and nurturing relationships with them.
While startup investing is a financial transaction, and you’ll need the data points and math to line up for them. Securing an investment in your startup is still significantly about human relationships. It is who you know, who knows you and knows you, likes you, and trusts in you relationships.
If you are starting from scratch with no network among the investors you intend to pitch, you can hack the process by getting introductions to them from people they already know and trust. Who do you know or can leverage that already knows them and has a relationship with them? Maybe that is your peer founders, fundraising advisors, mentors, and existing investors.
Then get busy building and strengthening those relationships. Invest time in getting to know them, building trust, and giving them value.
Create A Winning Pitch Deck That Converts
Regardless of your network, being able to get your messages through, and even having friendships with great-fitting startup investors, you are still going to need an effective pitch deck that checks the boxes, and converts.
In many cases, your contacts will have to justify and be able to defend this investment to those they are responsible to. Their families, their clients, and partners.
This means you must not only create an attractive pitch deck; it must flow with the correct order for your slides, and provide the key data that investors need to value your startup, assess the risks, and make an informed decision.
The fast track for getting this right, and efficiently getting a winning presentation completed is to use a proven pitch deck template.
Follow Up, Follow Up, Follow Up
Even the best pitches and decks are not always going to lead to an immediate deal. Even in the best-case scenario, you are probably looking at additional investor meetings, negotiations, due diligence, and finalizing paperwork before closing.
Investors are incredibly busy. So, even if they are interested, they can require some follow-up to get them to act. In sales in general (and fundraising is a sales process), it can take seven to eleven touches on average to convert and finalize a sale. So, be prepared to follow up.
Follow up with calls, texts, social, emails, and in person, and keep showing up and showing that you are executing.
Even as you’re learning about how to identify accredited investors, you might need more information about how to find investors for your startup. Check out this video I have created explaining the right sources of funding you should look for. You’re sureto find it helpful.
Other Financing Sources For Your Capital Stack
Outside accredited investors or even public crowdfunding with unaccredited investors are not the only way to raise money for your startup.
They can certainly play a significant, important, and valuable role. Including angel investors and VCs. However, they are just a couple of groups, which may be the optimal choices at some legs of the startup journey.
Here are some of the other sources of financing that can fuel your startup along this marathon. You might want to explore them even as you understand who qualifies as an accredited investor.
Loans & Lenders
Debt financing certainly has its role in business. This may range from using personal credit to get your venture started and off the ground, to merchant cash advances and working capital loans to keep growing after you’ve proved a track record of revenues, to convertible debt from early investors, to huge debt facilities for financing your customers.
Prize money from awards and competitions can be a great way to simultaneously both gain visibility and credibility while putting more financial fuel in the bank. Even better, as it is non-dilutive capital that does not need to be paid back.
This can include business plan competitions hosted by schools and businesses, hackathons, and coding events.
Startup accelerators can provide structure, direction, and positive pressure to make progress fast. They may offer additional resources, as well as some credibility. Though can also provide much-needed seed capital, with introductions to accredited investors at the end of the program on demo day.
Grants are another form of non-dilutive capital that can look great on your resume, and does not need to be repaid.
Don’t overlook the option to bring in additional cofounders that won’t just add their time and skills, but their own seed capital as well. Together you can cover all the initial skills you need, and self-fund longer so that you can negotiate better terms with outside accredited investors once you’ve achieved some traction.
Who are accredited investors?
Knowing who qualifies as an accredited investor is vital for a startup founder. You must know how they are different, what difference it makes in the fundraising process, and how to qualify them.
If you don’t, everything can be derailed by finding yourself bogged down by SEC investigations, lawsuits, and hefty financial penalties.
Then formulate a strong fundraising process for pitching and raising from accredited investors. As well as understanding the other sources and types of financing and capital available to your company, and how they all fit together in a smart financial stack.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.