Business angels finance start-ups with their own money, usually through an open investment in the company. Of course, there is also the complementary or exclusive case that the business angel only takes a silent participation or finances with a loan. Convertible loans also play a role, i.e. the business angel has the right to convert the loan into shares at a later date.
Example for funding through an open sharing:
A and B, as founding shareholders, each hold 50% in the start-up company X-GmbH. The share capital of X-GmbH amounts to € 25,000. A and B agree with the business angel C on financing via an open participation by increasing the share capital by 10 %, i.e. € 2,500. Together, both sides value X-GmbH at 500,000 €. Therefore, C pays a total of €50,000, of which €2,500 is paid into the share capital and €47,500 into the capital reserve of X-GmbH.
During the holding period of the investment, the business angel does not earn any money with the start-up. Only when he can sell his investment again (if possible after the company has increased significantly in value), he can hope for a profit from the proceeds of the sale.