How does Business Angels financing work?

Business Angels are financing start-ups with their own money, usually through an open share of the company. Of course there is also the possibility that a Business Angel takes only a silent partnership.  Also convertible loans are possible, that means, that the Business Angel has the right to convert the loan into shares after a certain time.

Example for funding through an open sharing:
A  and B are shareholder of the X -GmbH. Both of them have 50% of the company shares.  The share capital of the X -GmbH is € 25,000. A and B agree with the Business Angel C on a financing via an open participation by increasing the share capital by 10% (€ 2,500).  In addition they agree about the value of the company. They define the company value with € 500,000. Therefore, C pays a total of € 50,000, € 2,500  in the share capital and € 47,500 in the capital reserve of the X-GmbH.

During the holding period the Business Angel does not get a profit.  Only when he is able to sell his shares he will earn money.