In Winning Angels, negotiation is the next fundamental step for those involved in early stage investing. When it comes to the investor there are only two ways to go: either you do or you do not negotiate. Three main reasons why they may not negotiate are lack of desire to invest the time needed, they are concerned about the relationship with the entrepreneur when it is starting with a fight over money and control, and lastly, they may not think the terms or prices are worth it. (Amis and Stevenson) In these cases, someone else is brought in to do the negotiating, perhaps an attorney. If the angel is just not interested now, it is important they let the entrepreneur down easy by saying something positive. This will leave the door open for the entrepreneur to the possibility of returning to the investor with better terms and price. (Amis and Stevenson)
For the angels who negotiate, Amis and Stevenson say they usually negotiate one of three ways:
- Negotiate directly and actively until a deal is made or it is not.
- Make a one-shot offer with the terms.
- Have someone else negotiate for them like those above.
Most angels who negotiate focus on four main areas: price, structure of the deal, how much money they will invest, and what role they will play if any, according to Amis and Stevenson in Winning Angels. To be successful in these early stage negotiations, Amis and Stevenson have a few guiding principles for the angel.
- The angel should come from a position of strength. A highly regarded reputation by the community. Their own history of entrepreneurial activities. Prior business success in a leadership role.
- Have a lot of capital. If the angel or their group can raise 20-50% of what is needed this can lead to positive negotiations.
- Don’t drag out the negotiations. Make an offer, see the entrepreneur’s reaction and get the deal done.
- Set expectations early on. This might be the limits one has for investing or the need for the entrepreneur to change the deal.
- Position yourself as a value-added service. Besides capital, what other support can you provide: mentor, introductions, analysis, etc. This will help develop trust between the angel and entrepreneur.
- Make a deal that is beneficial for both parties. Low valuations and aggressive terms will only get the deal off with a negative start. Down the road the return on investment could be affected by this type of negotiation. (Amis and Stevenson)
But what about the entrepreneur during the negotiation process?
Jack Lander, an inventor and writer for Inventors’ Digest and Entrepreneur.com says, “The object of negotiations is to reach a meeting of the minds-an agreement that satisfies all parties to it.” Is that possible, when the investors hold many of the keys to the kingdom with capital and control? Like Amis and Stevenson, Lander has key points for the entrepreneur to think through before going into a negotiation. (Lander) Some of them may be reminiscent of what was discussed in early blogs for Winning Angels yet important to review before negotiation.
- What percentage of your business are you willing to give up? If it goes over 49%, how will you feel about that later?
- The dollar value of your business. The investor’s valuation of the business may be lower than yours. How will you sell the figure you have come up with?
- How much will the angel participate in your business? There are some angels that only invest capital where others are more involved. What are your expectations of the participation? This might feel like being micromanaged or it might feel like another resource for the startup.
- What are the exit plans for the angel and yourself? Remember the angel is looking at their return on investment and may not want to be in it for the long haul. Have you considered selling out to a larger corporation?
Rick Frasch, a contributor to Forbes, also has some suggestions for getting the negotiation off to a good start.
- Make sure the PowerPoint presentation (also called the deck) is not too long. Make good use of the time you are given and leave room for questions and answers.
- The business plan needs to be well written, supported and thought out. Angels need to see it addresses these points: problem startup will solve, size of the market startup is looking at, sustainable competitive advantage, expected revenues and costs of startups with realistic assumptions, and description of the startup team.
- Like Lander, an exit for the investors. You may have many reasons for your company and why you want to keep it but the angel is in to make money and get out.
- Do not ask for a non-disclosure agreement. They will not sign one. They may have seen an idea like yours before or will see more like it in the future. Not signing keeps the investors from future lawsuits from entrepreneurs.
- Let the angel or venture capitalist bring up valuation. The valuation is about the future, who gets what and how it will be split. It is better not to put it on the table right away, preferably to “let nature take its course” in the discussion of valuation and terms.
- The negotiating process can be draining with all the questions. Remember they are asking questions to better understand what you are doing. They might even have suggestions. For the entrepreneur these suggestions, questions and comments can provide you with things to think about regarding the startup. Reacting negatively will not be beneficial to your relationship with the investor(s). (Frasch)
Whether you are the entrepreneur or the angel investor, the key to a good negotiation is to be prepared and as Lander says, “negotiate in good faith.”
Amis, David, and Howard H. Stevenson. Winning Angels: The Seven Fundamentals of Early-stage Investing. London: Financial Times Prentice Hall, 2001. Print.
Frasch, Rick. “8 Mistakes Entrepreneurs Make When Pitching To Investors.” Forbes. Forbes Magazine, 18 Sept. 2014. Web. 13 June 2017. <https://www.forbes.com/sites/allbusiness/2013/07/09/8-mistakes-entrepreneurs-make-when-pitching-to-investors/#379f06721ca4>.
Lander, Jack. “Negotiating with the Angel Investor.” Inventors’ Digest, vol. 28, no. 9, 2012.