There are some key terms I would like to look at when it comes to a startup negotiating a deal with an investor. Robert J. Robinson, creator of the Entrepreneurial Negotiating Course at Harvard Business School, has explained the importance of the three terms when dealing with negotiations. These terms include interests, issues, and positions.
Interests boil down to whatever the investor or entrepreneur cares about that is at stake in the negotiation. For angel investors, this can consist of pre-emptive rights, a low price, a board seat, a limit on the entrepreneur’s salary, and exit opportunities. For the entrepreneur, this can include control in the company, the seriousness of the investor, whether or not the investor can affect management decisions, and ultimately the terms of the deal. These interests are what the investor or entrepreneur really care about and would like to have as part of the deal. Issues are the items that are being discussed and need agreement from the two parties. Issues will be how much equity will be given for the investment of if it is debt financing then how long will it take before the investor will be paid back. Positions are the specifics on the issue at hand. This can be the limit amount for the entrepreneur’s salary from the investor or the amount of ownership the entrepreneur is willing to give for the capital invested. I believe as an entrepreneur it is very important to not only understand what you ultimately want to accomplish in the deal, but what the investors interest may be as well. This will help the negotiation process go more smoothly and not get in the way of building a good relationship with one another.
One thing to consider is as a startup, you may not have as much leverage when it comes to negotiating an investment deal. The article in entrepreneur, "Negotiation Tips for Startups", provides tips to startups. One tip is to show confidence. Showing confidence can go a long way. When the investor sees how knowledgeable you are in terms of the market, sales projections, competition, and the overall business model, then they will often be more prone to make a deal.
“The trick to negotiation was to hold all the cards going in and, even if you didn't, to try to look as though you did.” – Eoin Colfer, Artemis Fowl.
Another tip for startups is to be prepared before setting up a meeting with an investor. The entrepreneur should know and understand what terms there are when negotiating and what interests, issues and positions they have. Lastly, entrepreneurs should avoid negotiating individual terms with each minority investors. Standard terms help give common ground to investors and simplify the entire negotiation process.
When looking at negotiating an investment deal for a startup, it may be wise to also consider how to negotiate with family and friends since they may provide a large part of the investment. The article, “How to make the kitchen table pitch”, gives insight into negotiating with close friends and family. One point that was made in the article is to view your family and friends as what they are to the startup, an investor. In the end, no matter how much they care for you and want you to succeed, it is a business with money involved. Another tip is to provide options for investing. Below is an example from the article on how you could set up options for family and friends to consider.
Option 1 $10,000 investment at a 6% interest rate for 5 years, after a grace period of nine months with a monthly payment of $201.19 starting in month 10.
Option 2 $25,000 investment at a 8% interest rate for 10 years, after a grace period of 2 years with a $1,049.61 quarterly payment, starting in quarter 9.
Option 3 $40,000 investment at a 10% interest rate for 10 years, interest-only loan repaid annually with a lump-sum $4,000 every year, with a lump sum payment of $44,000 at the end of the loan.
Something else to consider when negotiating with family or friends is to leave the business plan in the beginning and explain it verbally. I agree with this statement. I think when you are talking seriously with family and friends about the idea they know you well enough to see where you are coming from and how much time and effort you have put into developing the business. Once they are on board with the idea then that would be the time to show them the business plan and get everything in writing.
Amis, David, and Howard Stevenson. Winning Angels: The Seven Fundamentals of Early-Stage Investing. London: Pearson Education Limited, 2001. Print.