This post is the fifth of seven posts about angel investment in entrepreneurial ventures.
With Angel Investors, nearly everything is a matter of experience and style. Some will negotiate the terms of the deal, while others have a no-negotiation policy. Regardless of the investor’s preference, his or her concern at this stage is likely to be around four key areas: The price, the terms, the level of investment, and the expectations of involvement (Amis & Stevenson, 2001). Therefore, it is incumbent on the entrepreneur to have a solid understanding of these areas from both the sides of the deal before stepping into negotiations.
As we consider the implications of negotiation with investors, let’s take a look at these negotiation preferences in a little more detail:
Angels who refuse to negotiate
Angels who will not negotiate will offer many different reasons. Some may not want to invest the time in energy; others may be more concerned about first building a relationship on trust rather than on money, while still others may not think the terms of the deal are significant enough to warrant negotiation (Amis & Stevenson, 2001). Entrepreneurs should consider, though, that a no negotiations approach may also mean that the deal is attractive, but the investor may only find value on his or her terms. Stepping over a line and trying to force a negotiation will likely do one of two things: Garner more respect from the investor, or cost you the deal.
Angels who choose to negotiate
Angel investors who make a choice to negotiate may do so based on anticipation of their active involvement in the entrepreneurial venture (Amis & Stevenson, 2001). An investor may use the negotiations to test the entrepreneur’s powers of persuasion or skills in negotiating (Susskind, 2016). Persuasion and negotiation are critical skills for any business leader, and it is important to remember that a long-term relationship between the investor and the entrepreneur must be built on trust and a mutual respect of skills and abilities (Susskind). The negotiation strategy, then, must not be one that is a “winner take all” but one that is rooted in the ideas that both parties have an interdependent relationship and a mutual desire for success.
Entrepreneurs should consider that during negotiation investors will likely focus on the numbers, their exit opportunities, possible compensation for advising or coaching, and anti-dilution rights among other things (Amis & Stevenson, 2001). You, as the entrepreneur will likely focus on retaining your control of the company, valuation, terms of the deal, follow-up funding, reporting requirements, and possibly the overall seriousness of the investor (Amis & Stevenson). While these factors might seem in direct opposition, they are not. The goal is to find a mutually acceptable middle ground where both parties can win—or at least can see the upside to involvement in the deal. Anything less has the potential to poison the roots of the deal and potentially any fruit it may ultimately bear.
From an entrepreneur’s perspective, negotiation sets the tone for the business relationship with the investor. How and what the angel negotiates will tell you a lot about what the next few years are going to look like for you and your business. If you have reached this stage, you should already have a pretty good idea of what you are getting yourself into with the investor. Remember, each angel will have a different approach. Find the investor whose approach works best for you and your venture.
Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamentals of Early-Stage Investing. London: Pearson Education Limited.
Susskind, L. (2016, January 28). Four Factors for Successful Entrepreneurial Negotiations. Retrieved June 19, 2017, from technnologyreview.com: https://www.technologyreview.com/s/546191/four-factors-for-successful-entrepreneurial-negotiations/
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