In search of angels: the first bucket of gold for entrepreneurs

Purpose - This paper aims to explore the allocation of the exit value of a start-up company in market equilibrium between an angel investor and an entrepreneur in the very early-stage financing market. Design/methodology/approach - The theoretical model is established based on the two-sided random search theory and the model’s ability to match the empirical data is evaluated via simulation. Findings - The model indicates that the allocation of the final investment outcome is not proportional to the initial investments by the angel investor and the entrepreneur. The simulation results show that the continued investment by the entrepreneur and the private benefit acquired by the angel investor have a more profoundly negative influence on the angel investor’s share of the exit value of the start-up company. Moreover, the market search structure represented by the matching probability of an angel investor to an entrepreneur has a more significant impact on the angel investor’s share than the other model parameters. Originality/value - The importance of market search friction in the very early-stage financing market is emphasized. The concepts of continued investments and private benefits are introduced and quantified for the first time under the framework of angel investment. The impacts of such model parameters as the matching probability of an angel investor to an entrepreneur, the success rate of a start-up company, the bargaining power of an angel investor and the discount rate on the allocation of the exit value of the start-up company are investigated as well.