Part II: NEGOTIATING: 5TH Fundamental of Early-Stage Investing
Negotiation is a daily thing that many businesses engage in, including investing. The book “Winning Angels, The Seven Fundamentals of Early stage Investing highlights this common fundamental as key when looking for deals as an angel investor.
As a succeeding fundamental to Structuring, the text highlights different types of investors and the traits needed for negotiating. While some angels do not negotiate because they believe it gives an impression of being weak (which is not a good enough reason to give what is requested without understanding more about the deal), many angel investors prefer to negotiate to get the best deal possible because, as the author highlights, negotiating is a ‘two-way’ street.
However, the text notes that angel investors stand a better chance of getting a good deal if they add on an attitude of compromise which also helps build the type of relationship needed to win with the entrepreneur. While angel investors may choose to come in at different start-up stages, having substantial experience with early-stage companies is beneficial, often at the building level. This way, the investor can add value to the entrepreneur- who needs to have done enough due diligence, ensuring that the offer being put on the table by investors matches what obtains within the industry.
Furthermore, the entrepreneur must understand in-depth what the deal on offer entails to avoid seeming desperate, including considering ethical issues that may cause complexities in the future. For example, an early-stage African-based fintech company recently raised some seed capital and needed investors to give them powerful leverage into the US market. When the initial deal conversations happened with the potential VC, they were looking to partner with; some ethical issues were not divulged. When the deal was to be finalized, the early stage fintech noted critical ethical issues within the potential contract deal they were about to sign off on, which they were not comfortable with and had to back out of the deal completely.
Like many other things, deal clauses should be transparently stated at the beginning of every investment negotiation without any hidden ambiguities. In other words, the entrepreneur and angel investor must align with each other’s goals, funds needed, control mechanisms, terms of the investment sought, and exit options. The entrepreneur and the investor need ethical consideration that ensures a fair deal based on fairness, trust, transparency, and long-term viability.
Ultimately, it’s about finding the best middle point where all considerations are met in alignment with every stakeholder’s set objective thus birthing a win for everyone involved.
Resources
- Amis, D., & Stevenson, H. (2001). Winning Angels, “The Seven Fundamentals of Early stage investing. Pearson Education Limited. Print.
Dolapo,
I enjoyed your post and the section that you highlighted, “angel investors stand a better chance of getting a good deal if they add on an attitude of compromise which also helps build the type of relationship needed to win with the entrepreneur.”
I agree, investors and entrepreneurs need to maintain a collaborative relationship to be successful. Is it required, no. But useful, yes. I call the items I listed below my collection of “shoulds.”
Successful relationships build upon:
A Shared Vision: Both investors and entrepreneurs should align their vision for the company’s future.
Mutual Respect: Investors and entrepreneurs should respect each other’s roles and expertise.
Communication: Investors and entrepreneurs should have open and honey communication.
Long-term Success: Both the investor and the entrepreneur should be in it for the long haul. Risk Management: Both entrepreneurs and investors should be willing to manage risk.
Both parties (investors & entrepreneurs) achieve balance when they feel heard and respected, and when the “should” is the predominant auxiliary verb
Hi Robert,
I agree that it is not necessary for investors to collaborate with entrepreneurs. Nevertheless, like you rightly point it, it is beneficial and empowers success for the start-up, wherein the investor also wins. The items listed are strong points to be considered. I recently encountered this where a VC insisted they could not make any final decisions for the start-up because they had to respect whether they ultimately held the final say on what decisions to go with. Finally, from the viewpoint of an entrepreneur, it works in its favor when these virtues are present in an investor. It simply makes the journey and relationship smoother and sweet.
Thank you for your insightful contributions!
Dolapo
Hi Dolapo, what a great post once again. It is interesting you note that compromise will ease the negotiation process and build a better relationship. I find the same idea is true in life when often compromise helps find the middle ground. The ‘two-way street’ picture fits the picture of allowing both parties to meet in the middle. Perhaps investors don’t want to waste time or energy in trying to find that middle ground and that’s why they would rather send a partner to do the job. I don’t see it as a valid reason either as I think negotiation is a positive experience and an exercise to feel the person on the other side of the deal and find out where they stand on their ideals.