Angel Investor Series- Negotiating

Hi Friends,

In continuation of my angel investor series, this week I am going to talk about negotiating. 

It is important to know that many angels do not negotiate or they will often leave it up to someone else to handle.  Here are 3 reasons why they do not negotiate:

  • They do not want to invest their time
  • They are concerned with the efficacy of the relationship with the entrepreneur that is based on trust that starts with a fight over money or control or both
  • They do not think the price of the terms are that significant to negotiate.

The entrepreneur has a lot of power to give or withhold gifts and the relationship between the entrepreneur and investor is interdependent.  The entrepreneurs are the kings and queens of their small enterprises and your relationship with them will determine where you stand in line outside of any contracts that you have.  Some gifts that entrepreneurs have to share are:

  • First shot at follow-up rounds
  • Preferred opportunities such as in new developments
  • Referrals to other high-potential entrepreneurs
  • Networking to other key investors, VC’s, board members, and more
  • Information on company progress, plans, and unique opportunities that are developing.

If you are the type of angel who is going to negotiate, there are some things to think about.  “First, realize that there are situations where you can negotiate and those where you cannot. “ (David and Stevenson, 229).  Second, here are a few principals that you can use will be helpful in an early-stage negotiation.

  • Start from a position of real or perceived strength– You want to have “big wings” and the negotiations will go much easier for you.  When you have these big wings, entrepreneurs believe that your involvement in their company will have a direct impact on their success.  Big wings include strong reputation in the community, an entrepreneurial history, and well-known success.
  • Represent significant capital- “If your own capital, of that of a syndicate that you lead, amounts to a significant percentage of the capital raise, such as 20% to 50%, it will generally facilitate good-intentioned negotiations.” (David and Stevenson, 229)
  • Get to it- Do not waste peoples time.  Some angels make an offer at the first meeting, which can encourage the whole process to move a little faster.
  • Establish precedents- When you do this, you set the expectations about what can happen and it shows that you have limits.
  • Sell value-added- Some winning angels will position themselves as added-value participants and then, add value (imagine that).  When you support the entrepreneur, they are more likely to win and you will develop a more positive relationship with each other.
  • Don’t gouge- This will lead to a negative relationship with the entrepreneur.  Pinning the entrepreneur down for highly aggressive terms and a low valuation is one of the worst things you can do.

I enjoyed reading this section and learning the reasons why some angels do not negotiate.  It gave me a lot of insight from both sides of the conversation.  Would you negotiate as an investor?

Thank you for stopping by and reading my blog. 

Until Next Time,
Dani

References:

Amis, David, and Howard H. Stevenson. Winning Angels: the Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.

2 thoughts on “Angel Investor Series- Negotiating

  1. Tony

    Dani,
    I enjoyed reading your review. The information you shared was very supportive of a healthy and friendly relationship between Angles and Entrepreneurs. While I know poor relationships exist, it is great to have a perspective of what an engaged and partnered one looks. I did find humor in your comment around ‘value-add’ and actually adding value. I believe that if both sides understand and see the benefit of the relationship, the chances are better for success. If either side is already pulling at the relationship, cracks may form and success may be limited or not happen. Thanks for the read.

    Like

  2. Tom Huchko

    Dani,

    You hit the nail on the head with the first point! What is the main reason that an investor wants to invest? They want to make money without investing any time. If they had time, I am sure they could come up with a few different businesses and pour all that time into starting it. It’s important to understand why someone is doing something. If you can look at things from their perspective it will make negotiating much easier.

    You’re so right, keeping that relationship intact is probably the most important part of the whole deal. If a business does well, you likely want to work with that entrepreneur again in the future right? There is no reason to get greedy and ask for too much, leaving the entrepreneur feeling negative about the whole situation.

    Thank you,
    Tom

    Like

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