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/
Featured Image Source: Getty Images, Tom Merton
10 thoughts on “Negotiating with the Angel Investor”
I agree with your statement on the goal with negotiating is for both the entrepreneur and investor to come to a mutual agreement on the terms of the deal and the amount of involvement of the investor. In some ways, I can see how beneficial negotiating a deal can be. Both the entrepreneur and investor can get a glimpse of how their relationship will be like going forward through the negotiation and if the investor is a good fit to the startup.
I agree with you David that the negotiations set the tone for the relationship with the investor. Also good point in that also the final negotiations reflect the path of the next few years. This is an extremely crucial stage. Great job summarizing this chapter.
It seems that the seasoned angel investors do not want to bother with negotiating, but the inexperienced want to be involved as much as possible and know exactly what is happening with their money and how and when they will see returns which is all determined in the negotiations. As an entrepreneur I think I would rather have a seasoned angel investor who is less uptight, gives more freedom and is more focused on the trust and relationship. Great post!
It’s definitely tricky to know whether or not to push for negotiations with an investor who does not want to negotiate. It is important to accept money when and where you can as your business depends on it, however, I wouldn’t accept every offer that is presented to me if it doesn’t feel right. There are plenty of investors out there who will believe in your vision and your valuation (or close to it). Go out there and find them if you have time to wait on extra money. Sometimes, waiting is just not an option.
Enjoyed your post – The “Shark” show demonstrates how quickly an entrepreneur can lose a deal during the negotiation phase. It’s like walking on egg shells- if you say the wrong thing- ask for too much -question the investors- you could lose the deal. However, I think an entrepreneur should have a balance – they should remain confident, knowledgeable about their business, their worth; but, we must also be open to different offers- maybe it will be more effective for the business. I think I would request a mentor or someone else to speak on my behalf. It can definitely be intimidating . lol
Mutual agreement is important. Or at least an agreement that both parties can live with. Otherwise, someone feels as if they were taken advantage of and that can kill a relationship over time.
One never knows when one might run into that investor or entrepreneur again; it’s best to be professional in one’s dealings. 🙂
Oh, I very much agree with you. I would much rather be involved with a seasoned, less uptight angel investor. But, we as entrepreneur’s need to prove that we’re capable of the freedom and trust that would require of an investor. 🙂
You are correct, Alex. There are a lot of investor’s out there who might believe in the entrepreneur’s vision and valuation. It can be challenging to discern whether that no-negotiations investor is just testing the entrepreneur, or if he or she can add value to the business and help the entrepreneur new develop skills and abilities. Choosing an investor based on the path of least resistance many not be the best course of action in the long-run.
Frankly, some of my favorite episodes of “Shark Tank” are those in which the entrepreneur has a deal (often from multiple Sharks) and then talks too much and loses it. So much of that show is about inflated valuations and ego-centric entrepreneurs. It’s entertaining, to be sure. Confidence and knowledge, to your point, is critical for the entrepreneur during negotiations. But it’s best to check the ego at the door.