Entrepreneurship and Small Business (ESB) V2 Certification Practice Exam

Angel investors typically provide funding to businesses in exchange for which of the following?

1. Loans with low interest rates

2. Subsidies for operational costs

3. Equity stakes in the business

4. Fixed repayment schedules

The correct answer is: Equity stakes in the business

Angel investors are individuals who provide capital to startups and early-stage businesses in exchange for equity stakes in the business. This means that they invest money in return for a percentage of ownership in the company, thereby aligning their interests with the success of the business. As a result, angel investors are often motivated to provide guidance and support to the entrepreneurs they fund, as their financial success is directly tied to the growth and profitability of the company. Funding from angel investors typically occurs in the early stages of a business when it might be too risky for traditional lenders. Because these investors take on a higher risk, they seek potential high returns, which come from owning a part of the company rather than lending it money under fixed repayment terms or receiving subsidies that do not involve a stake in the company. The nature of this financial relationship encourages a more collaborative approach to the business’s growth, fostering mentorship alongside investment.