ENT 640: Winning Angels: The 7 Fundamentals of Early-Stage Investing

ENT 640 Week 6: Negotiating

ENT 640 Week 6: Negotiating

Negotiating between entrepreneur and investor really comes down to the investor wanting to negotiate terms or not. Newer investors tend to want to negotiate and build relationships with the entrepreneur whereas most winning investors do not feel the need to negotiate terms. “Angels who do negotiate are more likely to have an active role in their investment. (pg. 228)” The top four things that need to be discussed and come to agreement during the negotiation process are:

  1. Structure of terms of the deal
  2. Price
  3. Amount of capital to be invested
  4. The role the investor will play

There are a few different approaches to negotiating terms:

  1. “Negotiate directly and actively until the desired outcome is achieved or unlikely
  2. Quickly offer final terms in a one-shot offer
  3. Get someone else to negotiate, for non-negotiators (pg. 228)”

What a winning investor actually want out of an investment:

  1. “Respect
  2. The ability to share in the winnings
  3. Information
  4. Return of capital as soon as possible
  5. A feeling of having contributed and made a difference
  6. The ability to get out if circumstances change
  7. Fun (pg. 234)“

Tips for early stage negotiating:

  1. Start from a position of perceived or real strength – involving well-known successful people
  2. Represent significant capital – 20%-50%
  3. Get to it – get the deal done fast and at a good price, make an offer in the first meeting
  4. Establish precedents – set expectations and define limits
  5. Sell value-added – the angel will provide advice and support along with investment
  6. Don’t gouge – don’t have high terms and low valuation

Most investors will spend a lot of time focusing on numbers and negotiating terms on how much they will get in return which often leads to bad relationships between investor and entrepreneur. In contrast the winning angels do not negotiate because they feel it leads to a lot of problems they otherwise wouldn’t have. Here is a list of other things that winning investors do:

  1. Make sure the entrepreneur is not in it just for the money – evaluation stage
  2. Focus on the structure instead of the price, “Connecting ownership to performance is a great way to let them have their pie if they can do a great job baking it! (pg.236)”
  3. Support the entrepreneurs in the negotiating phase to come to an accurate valuation
  4. Go with the price the entrepreneur has set up
  5. Make sure the entrepreneur is represented
  6. Treat the entrepreneur as a partner
  7. Actively negotiate before making an investment
  8. Use a one-pager to keep lawyers from renegotiating

Some of the winning tools and tactics that investors often use include:

  1. Waiting until the second round to begin negotiating
  2. Make a one-time counter-offer
  3. Get other people involved to handle the negotiations
  4. Give the entrepreneur terms to meet before you will invest, to give the entrepreneur an opportunity to prove themselves.

“The whole idea of negotiation is that both sides be better off after making the deal. (pg.242)”

 

References:

Amis, David, and Howard H. Stevenson. “Negotiating.” Winning Angels: The Seven Fundamentals of Early-stage Investing. London: Financial Times Prentice Hall, 2001. N. pag. Print.

Loading Facebook Comments ...

One thought on “ENT 640 Week 6: Negotiating

  1. I like the way you laid out the bulk of material here in such an easy-to-read format. I was struck by the investor tactic to wait until the second round to start negotiating demands. That brings up the point that entrepreneurs need to think a few steps ahead on any of these arrangements so they don’t put themselves in an untenable position six months from now. It may be stating the obvious, but a good rule of thumb for me is: don’t negotiate something you can’t afford to deliver on!

Leave a Reply