How to Negotiate with Prospective Investors

Getting the funds for your business is a time-consuming process and can be very stressful too, especially as time goes by. There might be some time in the future where your current trading position is not sustainable. It is worth remembering that you need to recognize that the more desperate your situation, the more vulnerable you will be which can result in poor decisions. The sooner you can start the process the better.

The first thing you need to do is identify some potential investors that can bring more to the table than just cash. Then you will need to submit a business plan or executive summary to them so they can assess the opportunity with more context. Assuming you pass this, they are likely to invite you to a meeting. If you have been asked to come in to pitch you need to remember the process should be a balanced discussion. It should resemble an interview where the discussion is by both people, not just a one-way interaction where the prospective investor scrutinizes your business plan as you defend the content. Remember, it is not just about the cash, so you need to be clear about what other requirements you have to help you secure the money.

Identify the Involvement of Your Investor

Make sure that you identify the investor’s objectives in funding your business. If the investor does not show an interest in being involved, make sure that you emphasize their involvement is not a prerequisite for the company to be successful.

Size Up the Investor

Make sure that you understand the investors capital limits before you approach them. Try to learn your investor’s funding portfolio, interests, financial background, and risk-tasking history. The negotiation process should also give you the opportunity to understand whether a prospective angel investor has the ability to provide the funds you need. By knowing your investor’s funding limits, it will help you score a good investment deal and maximize the investment size.

Build the Investor’s Trust

Securing funding from angel investors involves building their trust in you. You need to show your reliability, competence, and sincerity to an investor. Be consistent in your presentation with your co-founders. Otherwise, investors will lose trust in you and lose track of the message you want to portray.

Understand the Investors Interest

You should also explain how your company will blend into the investor’s portfolio. Make sure that your business idea interests a protentional investor. Investors tend to invest in areas they understand and feel comfortable with.

Questions to Ask Investor’s

• What can they bring to the table besides cash? - Ideally, you’ll look to partner with an investor who has knowledge of your specific sector, as well as a network of contacts that can be called upon when needed.
• What is their preferred exit strategy? - ask about the timeframe in which they are looking to exit and understand their future plan.
• What is their required level of involvement? – it is worth understanding at an early stage how active a role the investor wants to play in your business.
• What other investments have they done? - ask the prospective investors if they could provide you with some references from current investments.
• What are the terms of their investment? – be very clear on the terms of the investments.

The Bottom Line

By having a strong business plan, an impressive team, a viable market opportunity, and a keen understanding of the investment process, you can ensure that you engage on strong terms. When you better understand the needs of the other party, then you will find items that are very important to them but have less value for you. You can exchange these for items which are important to you but have less value for them.