How to Negotiate Successfully with Your Potential Investors
Recruiting investors for your start-up is difficult. Find out how you may improve your negotiation skills in order to convince investors to come on board.
Published by Nir Netzer CPA Director of Business Development at Privatequity.biz
Negotiating with investors tends to be an exhausting process. They may have extensive experience in checking up on entrepreneurs like yourself, an existing list of alternate ventures they are interested in, professional consultants, a lot of patience and a high awareness of the speculative and risky nature of the start-up business. Various tactics, methods and tips, however, can improve your negotiations skills and upgrade your position in the process.
Valuation: Be Realistic
At the heart of the negotiation lies the company’s valuation, determining the amount of shares the investor will get for his investment. The most important valuation rule is that it must be realistic and not exaggerated. The investor is not likely to fall for an overpriced valuation; most likely he will suspect your integrity and professional skills. The valuation must also exclude FFF investments, i.e. family, friends and fools, since they are all regarded as private sources.
Game Theory Principals
The Game theory is a theory that utilizes mathematical tools to analyze and better understand situations and the decision making process and can supply you with very useful methods to handle negotiation scenarios. The theory is too extensive to discuss here in detail, but we have highlighted some of the essential points as follows:
- First, you must identify the investor’s tactic — is he using attrition? Is he using the salami tactic (also known as salami-slice strategy)? Does he start by aiming higher than he really means? Identifying the tactic will enable you to understand his way of thinking, predict his moves and handle his approach accordingly to your benefit.
- After ascertaining his tactics, identify all possible scenarios and decide your action plan for each scenario. Try analyzing the possible scenarios from the perspective of the investor.
- The desired outcome of the negotiation should be a win-win situation. Since you will enter a close working relationship after successful negotiations, it is not a good idea to have any negative feelings stand in the way and cast a gloomy shadow on your partnership. A satisfied investor will be more inclined to contribute to the venture, in accordance with his perceived gains secured from you during the negotiation. On the other hand, that does not mean of course that you have to go overboard to satisfy the investor and bend to all his demands, giving up all your principles.
Negotiation: It’s all About Preparation
- It is crucial to prepare yourself thoroughly before the negotiation starts. Get acquainted with your investor, how he conducts business, his preferences, his weaknesses and strengths, his interests, his investments etc. Needless to say, you have to master your company’s business plan, its markets, its competitors, the amount of money you intend to recruit, the ways you are going to use the money, the opportunity for investors etc. You should also prepare the company’s financial forecast for the next 3 — 5 years, describing the way the company will increase its value and the investment’s worth. Comprehensive preparation will increase your confidence and consequently the investors’ inclination to invest in your venture.
- Simulating your pitch and the subsequent negotiation is recommended too. Try to predict the toughest questions you may come across and prepare your response.
- Investment negotiation is a process, and may take many months to complete. It may include stages like presentation, initial negotiations, company valuation, presentation of an investment offer letter, due diligence process, final negotiations, signing of terms and final agreement. Therefore you must have the patience of a saint and should not exert any pressure to hurry the process up. Rushing the process will make you look desperate and therefore vulnerable at the negotiation table. Use the time between meetings to review your actions, make a self-assessment and improve your tactics.
- It is very likely that you will negotiate with more than one investor. Every negotiation is an opportunity and use these chances to learn as many lessons as you can to improve your negotiation skills and be a better negotiator the next time.
- If you are negotiating with a number of investors and have to choose between them, take into account their overall value. On many occasions, the added value of a strategic investor will be more valuable than a financial investor’s larger investment.
Negotiating with your investors is a critical and significant process, and not only a financial one. The negotiation’s outcome may determine the very existence of your company, the type of directors you will have on your board, the type of co-operation you will have with them and their future contribution to the company. Having said all this, it is clear that you cannot overestimate the importance of negotiations, and the bigger the effort you extend in preparing yourself properly, will have a direct influence on the size of the pay-off at the end of the day.
Originally published at privatequity.biz on November 30, 2014.