The Negotiating section of Winning Angels: the 7 Fundamentals of Early Stage Investing, mentions an idea I’m interested in: angel investors that negotiate. Chapter 38 starts off with “the Golden Rule” which is “He who has the gold, makes the rules” (228). This is a tricky statement for me to wrap my head around from, both, the perspective of the investor and the entrepreneur. If the investor tries to make the rules because they have the money, they could either lose the deal or lose the respect of the entrepreneur. That type of relationship can only end poorly, in my humble opinion. Investors may speak with many entrepreneurs, but entrepreneurs speak with many investors as well. It’s important to state your goals clearly, as the entrepreneur, and vice versa. This way, the entrepreneur and the investor know what to expect and a middle ground could, possibly, be made.
The chapter lists three general approaches to investment: negotiate directly, quick offer, and using a liaison (228). Negotiating directly is exactly what it sounds like. An investor will work out a deal with an entrepreneur until a mutual desired outcome is reached. A quick offer is when an investor lays out the final offer for what they are willing to do, and the entrepreneur has one shot to accept or decline. Using a liaison is what investors do who don’t negotiate. They will hire someone to do the negotiating for them and trust that they will make a great deal for the investor.
When negotiating with an investor or entrepreneur, come from a point of strength. As the entrepreneur, it is your duty to show the value that you bring to the investor. The same goes for the investor, if you can’t show the entrepreneur how your investment will help the business…it may be a deal breaker (229).
As an investor, if you can bring in a majority of the funding round, you can more easily demand improvements in the terms of the deal. As the investor, you are getting better terms on your investment, but you are also doing a great service to the entrepreneur. Even though you require more than the entrepreneur offered, you are helping that entrepreneur complete their funding round in a major way…which has a very high inherent value (229).
If you make a general, informal investment offer early on…the entrepreneur knows where your boundaries are and may not ask for more than your limits. This is also a great way to get the entrepreneur excited and accepting terms, informally, earlier on. This will make the negotiations (if any) go much smoother. This ties in hand-in-hand with establish precedents as well (230).
Show the added value! If an entrepreneur believes that you, as the investor, bring something special to the table then it can have power during the negotiations. If the entrepreneur knows that you are willing to help them succeed, they are more willing to take a little piece of a really big pie…rather than a really big piece of a little pie (230).
Gouging is bad…mm’kay. This can lead to tensions early on in the investor/entrepreneur relationship, should the entrepreneur even elect to take your offer. Aggressive terms also stifle the growth of a business and you will see very little returns on your money than if you made a reasonable offer.
Amis, David and Howard Stevenson. Winning Angels: the 7 Fundamentals of Early Stage Investing. Pearson Education Limited, 2001.