How to Negotiate with InvestorsJune 12, 2020
Having nailed your pitch, you’ve succeeded in getting the attention of an angel investor. Congratulations! Before you pop open a bottle of champagne though, you’ll need negotiate a deal. Here’s your essential guide to negotiating with angel investors:
Understand what’s on the table
Starting with the basics, you need to know what’s on the table at this early stage of investment. From an entrepreneurs’ perspective, your focus should be primarily on retaining control of the company. In simplified terms, you want to give away as little of your company as possible, while attracting enough capital to get your startup to the next stage. This means you’ll need to arrive at a valuation of your company. At this early stage, that can be tricky, so your first step should be to understand how much you startup is worth. Our guide, How Do Angel Investors Value Startups?, can help you with that.
Beyond strictly valuation, there are a few other points to negotiate on. These are:
- Follow-up funding conditions. The angel investor will want to secure anti-dilution rights while the entrepreneur will want to ensure the best conditions for future investors in the event another round of funding is needed. Read more: Startup Funding Rounds Explained
- Level of involvement. How active will your angel investor be in your startup? Will you angel investor be directly compensated for their involvement? These are some of points to negotiate on at this early stage.
Negotiate for mutual benefit
The first rule of negotiation is to not have a “winner takes all” antagonistic mindset. Particularly at this early stage, your focus should instead be on establishing a positive working relationship. For your startup to succeed, you’ll want your angel investor to be on your team. This may mean giving up more equity than you otherwise would, while also being flexible on the other terms and conditions. By the same token, your angel investor will want you, the entrepreneur, to be sufficiently motivated. That means the investor will be hesitant to take too much of your company. If you’re genuinely worried the investor is taking too much, you should frame your protest such that the investor sees the loss of mutual benefit. For example, point out that if your equity is diluted too far, you risk losing top talent; something that ultimately jeopardizes the angel’s investment.
Don’t be afraid to pull out
Observe carefully the behavior of your angel investor during the negotiation process. Negotiations often reveal a lot about the way people approach business. Are you sure you want to enter into a long-term business relationship with the person? If, for example, the angel investor is pushing hard on gaining more control of your startup, that could be a sign she likes your idea but doesn’t trust your management. Signing at deal with this angel may mean you and/or your co-founder end up on the sidelines just as your company goes super nova.
Know your angel investor
Of course, the way you negotiate will depend a lot on the type of angel investor you’re dealing with. For instance, if you manage to bag an archangel investor (an angel investors with a proven track record of making a lot money for other angel investors by bringing them on board to projects that become successful) you should be willing to give up more of your company because the money and connections brought to your startup by this investor are far more valuable than a few percentage points of equity.
After an investor meeting, be sure to summarize the proposed or negotiated term sheet. Asking follow-up questions will not only prevent later misalignment, it will also demonstrate your interest and professionalism to the investor at hand. This builds trust between you and the investor at this still early stage of the negotiation. A lot can change between the drafting of an initial term sheet and the final signing of a deal.
The contribution of an angel investor typically goes well beyond the financial aspect, and you’re advised to keep that front and center in your mind during the negotiation process. As a final word of advice: even if the negotiation process fails in the end, smart entrepreneurs should pay close attention to the reasons why. Doing so will help them get the deal they want when the right angel investor does come along.