Here we are at the negotiating fundamental of early-stage investing. Knowing how to negotiate the terms of an investment agreement with an angel investor is going to prove pertinent to you as an entrepreneur looking for additional capital.
In Winning Angels: The Seven Fundamentals of Early-stage Investing by David Amis and Howard Stevenson the authors discuss negotiating from the angel investors chair, which I will only touch on briefly. My real focus here will be the quick and dirty on what you need to know as an entrepreneur sitting across the table from that angel investor.
Angel investors will either want to negotiate terms, perhaps even tediously, or not negotiate at all. Some investors will even accept or reject the deal without any kind of negotiation or second thought. So, do not be surprised if an angel does not negotiate the deal and just accepts as-is. In some cases, things are good as-is or if the investor is not the lead in the investing chain, they may not negotiate or participate. Just be sure that you are not giving up so much of your company, that the investor knows they better snag it up quick and in a hurry.
Amis and Howard speak to the angel investor in this section about the importance of how they look at negotiating because it has an impact on the entirety of the deal, the terms, price, and structure. The negotiating stage also impacts the relationship between the investor and you, the entrepreneur. Angels negotiate four parts of a deal, the structure or terms, the price, the amount of capital they will be investing, and their role. In these negotiations they will take into consideration what role they want to play, the time they have available, what relationship they want to have with you, if they are going to be the lead investor, and how much money they are going to invest into your business.
Note, that one of the most important factors that angel investors will consider is their relationship with you. Of course, if the investor does not have the time or does not see the value in investing with you, that could be the reason they walk away as well. I would not necessarily take an investor passing on a deal very personally. Just try to learn from the experience, grow, and try again elsewhere.
Knowing how to properly negotiate can have several benefits to you as an entrepreneur, according to Under 30 CEO contributor, Rishi Anand. You can receive better terms, you can get the capital, and you can keep a proper percentage of equity ownership in your company. You can also avoid losing a good deal because you overlook the value of the angel investor, their actual capital offering, social capital, time, and their experience. Futhermore, you can learn when the deal is just not right for you and can leave it on the table.
There are a few things to consider when negotiating with an angel investor says Anand:
What is the investor’s experience in your industry?
What resources does the investor have that you could leverage for your business’ benefit? This could be access to real estate, social capital, experience, knowledge, or connections with wholesalers or suppliers.
What does their investment portfolio look like? Do they have a positive track record? If your investor was found by you through recommendations and research, you should already have a good idea in this area. You may even be able to do additional research by reaching out to others in his/her portfolio. Make sure it is okay to contact before doing so.
What is the payback period, terms and conditions?
Can you trust and build a relationship with your investor? Anand says to beware of “good cop, bad cop” from the investor and their advisor.
How much involvement will the angel investor have in your business?
Will there be legal involvement in the deal drafting and deal structure? You may consider having someone to counsel you legally during the negotiations.
What will the deal structure look like?
And finally, what is the angel investor’s net worth?
These are just some of the considerations that you as the entrepreneur should be looking at when negotiating a deal. They will greatly assist you in making sound decisions and choices so that your business can benefit from an angel investor’s involvement rather than make the wrong decisions that lead to your business’ demise.
If you are looking for the questions from the angel investor’s chair. Anand provides a link to a great source here, Angel Investor Due Diligence.
Amis, D., & Stevenson, H. (2001). Winning Angels: The Seven Fundamental of Early-stage Investing. Pearson Education Limited.
Anand, R. (n.d.). An Insider’s Guide: Negotiating with a Business Angel Investor. Retrieved from Under 30 CEO: http://under30ceo.com/an-insiders-guide-negotiating-with-a-business-angel-investor/