The Negotiation section of our book is a relatively brief section but offers great content about the important aspects of negotiating a deal with entrepreneurs. The first and foremost question to be answered is, negotiate or not to negotiate? The authors make a good case for both sides of this question, but at the end of the day, they have good information about how to negotiate successfully.
If angels decide to do their own negotiation, there are four main objectives to focus on;
- The price
- The terms
- How much money will they invest
- What role will they play
A winning investor wants to accomplish a few things when making a deal, and feel good about it. They want to be treated with respect and have access to information. They want the ability to share in the winnings and get a return on their capital as soon as possible. Angels want the ability to get out if the circumstances change significantly. And finally, they want a feeling of having made a meaningful contribution while all along, having some fun.
My take away from this section are the six principles of negotiation in early-stage investing.
- Position of Strength. They call it having “big wings”. If as an investor, you have a well-known reputation for success, the entrepreneur will believe your involvement will directly impact their success.
- Represent Significant Capital. Whether the angel alone, or representing a group of investors, having significant capital to offer will facilitate good-intentioned negotiations.
- Get To It. Making an informal offer during the first meeting is a good way to get engaged and get the deal done quickly. It also is a good way to gage the entrepreneurs’ reaction.
- Establish Precedents. Angel investors will show their hand a bit and set expectations to show they have defined limits. Another aspect is sending the entrepreneur off to work on improving the deal before the angel invests.
- Sell Value-Added. Winning angels will position themselves as value-add participants, convincing the entrepreneur that he is more likely to succeed with the angel’s help.
- Don’t Gouge. The worst thing an angel can do is create a non-positive relationship, and beat up the entrepreneur for a low valuation and highly aggressive terms.
David Amis and Howard H. Stevenson. Winning Angels: The Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.