Should you negotiate with an Investor?

04 Jun Should you negotiate with an Investor?

As a female Certified Public Accountant located in Weaverville, NC, situated in the greater Asheville, NC market, it is very common for me to interface with start-up companies. Some companies are set up to be one woman or man operation while others are more complex in nature. During this blog, I focus on the negotiation aspects of working with Angel Investors. These concepts are laid out in the book “Winning Angels the 7 fundamentals of early stage investing” written by David Amis and Howard Stevenson there are five approaches to valuation.

If Shakespeare had been an entrepreneur he may have written “To negotiate or not to negotiate, that is the question”. When talking with Venture Capitalists or Angel Investors it’s hard to know whether you should take their offer and run with it or if you should knock out a few changes to the contract. If you have ever seen the TV show Shark Tank you know that negotiating with someone who holds all the money and a lot of business knowledge is a serious game of cat and mouse (remember YOU are the mouse). Sometimes you get lucky and win, and more often than not you lose.

According to The Winning Angels Study © 2000, conducted by David Amis and Jocelyn Dinnin they outline what most investors do, and the even highlight was the most successful ones do. Here is what they found:

Most Investors:

Focus on the numbers – they feel their initial ownership stake to be their most important negotiating issue. They feel that the more power they have to affect the company the greater chance their stocks future value may increase.

Spend a lot of time – since they comfortably spend a lot of their business negotiating they do not feel any rush in closing the deal. They will be happy to wait out the entrepreneur until they agree to their terms.

Focus on who gets what – Most investors look at negotiations in an adversarial fashion. They work hard to be the winner in the win-lose game of negotiation. Often the other party walks away with a bad feeling and the company starts out on a bad foot.

Successful Investors:

Don’t negotiate – many successful investors do not negotiate personally. They may have a trusted attorney or point man do this work for them. It helps them maintain a productive relationship with the company’s inventor or original entrepreneur. Relationships are maintained using a 3rd party negotiator. Steve Walker states “We tend not to haggle a lot, we want a cooperative relationship”.

Screen out “greedy” entrepreneurs: One investor stated “Greed is one of the biggest problems. I’ve dropped out of more deals because of it”.

If they do negotiate, they do not leave the entrepreneur feeling short changed. Focusing on creating a win-win situation bodes well for the long run.

Focus on the structure– When you focus on the companies structure instead of a price you let the investor feel that they are ending up with a deal that they want. Again, this is a focus on creating a win-win situation maintaining relationships.

Become the entrepreneur’s advocate– Betsy Atkins indicates she believes her job as an investor is to support the entrepreneurs as they build the business together.

Make sure the entrepreneur is represented – John Hime likes to make sure that all the companies he deals with gets a team of professional on board to include a law firm and an accounting firm. This approach ensures that way both of the sides of the negotiation table has legal and financial representation.

Treat them well– George Kline, a VC, negotiates with the mindset that these people will be his partners, and you need to be on the same side with your partner.

Move Fast- Lucius Cary likes to make an offer in the first meeting. He states “if negotiations take more than two weeks, I am unlikely to invest”. He prefers to knock out these details early so that you can get on with the business of building a company.

Keep lawyers from re-negating or changing the deal. Remember that they lawyer works for you. Try to keep your contracts to one page.

Other Blog Posts of interest:

Three ways to structure your new business

Methods Investors Use to Evaluate Companies

Funding for Small Businesses

Small Business Retirement Plan Options

Women in Business

New Business Start-up Tips from a CPA