For those who are seeking funding to start or grow a new business, pitching the idea and plan to potential investors is a critical step. Understand what works and does not work with an investor who has been through it before is important. Carefully managing power dynamics is crucial to getting the terms you want and need. Today we are discussing some points on how to negotiate an investment deal.
Listen to learn
The first thing you need to do is listen and wait. Wait to see what investor offers before posing your thoughts and terms. Listen closely to what your concerns and excites your investor about your business. Both can be key indicators of your company’s strengths and weaknesses.
Determine if an investor will act in your best interest and will be a good partner. Ask questions around their enthusiasm for your company’s mission, and their strategic involvement style. Focus on selecting a partner that will help you when hardships and unforeseen obstacles inevitably arise.
If a deal is not good for both sides, it is not a good deal. An investment begins a deep mutual relationship. Both sides need to have common objectives and shared goals.
The deal lead should have specific industry experience. Deal lead in this context refers to the one angel investor who leads the negotiation for the group of angel investors.
Use a professional and experienced lawyer. Someone that has experience in the specifics of negotiating investment deals between investors and entrepreneurs.
Do not over-negotiate. People focus too hard on the negotiation process and end up spending too much time and money because of focusing on unimportant details.
Learn to Leverage
You should look out for your company’s interests and build longstanding, healthy relationships with investors. Leverage your strengths. Are multiple investors interested? Use them to show you have options while simultaneously illustrating another indication of your value. If you don’t have multiple investors, you can use other assets, or even arguments. Will the term your investor is proposing hurt your employees? Talk to them about how your company is on a growth trajectory, but it can’t stay that way without top, committed talent.
Keep an Open Mind
If you are too firm on your terms, it can slow or stall negotiations. You do not need to fold on every issue, but you should be looking for opportunities to listen or reach a middle ground. If there is nothing you cannot budge on, consider why and if there is another way to get the same outcome in a more conservative way.
You might think being tough and keeping your options narrows shows strength, but it puts you in a bad position with future business partners. They will not look forward to working with a person who is intractable.
The negotiation is about creating long-term business partnership between investors and entrepreneurs. There are things people can do that indicate the long term is not going to work out. Do you want to do business with these people? It is a question both sides should be asking.
The Bottom Line
As entrepreneurs, you should keep this list in mind as you negotiate with investors. It will help you understand what they are thinking.