4 Ways to Negotiate with Your Investors Like a Pro
You’ve done the work — from building the actual company to meeting investors and pitching them. What comes next? For a lot of entrepreneurs, term sheet negotiations are the most opaque part of the whole funding process. Consequently, they don’t know how to deal with negotiations or the investors on the other side of the table. But the whole process can be relatively simple and painless if you stick to these four principles.
1) Come from a Place of Trust
Your investors are not your enemies. And if you have reason to think they are, don’t take money from them. Find another way. But generally, good investors are trying to build a partnership with you. Yes, they may have different interests from yours — that’s the point of negotiations. However, in order for them to succeed, your business has to succeed, too. If you remember that both sides are coming in basically on the same side, the side of your company’s success, it’ll make negotiations less adversarial and more constructive. That will ultimately benefit you after the negotiations close and you still have to work together.
To negotiate well, you can’t just come from a place of trust, you also have to establish trust. Your investors expect you to ask for better terms and talk to other investors. But once you’ve reached an agreement, that kind of behavior will put up serious red flags and hurt your negotiations. Again, no one wants to do business with people that can’t be trusted.
2) Learn to Leverage What You Have
Building longstanding, healthy relationships with investors doesn’t mean giving them whatever they want. You can, and should, look out for your company’s interests. That’s part of being a good founder.
So how do you do that without souring relationships? Leverage your strengths. Are multiple investors interested? Use them to show you have options while simultaneously illustrating another indication of your value. If you don’t have multiple investors, you can use other assets, or even arguments. Will the term your investor is proposing hurt your employees? Talk to them about how your company is on a growth trajectory, but it can’t stay that way without top, committed talent.
3) Keep an Open Mind
Being too firm on your terms can slow or stall negotiations. You don’t need to fold on every issue, but you should be looking for opportunities to listen or reach a middle ground. If there’s something you absolutely cannot budge on, consider why that’s the case and if there’s a way to get the same outcome in a more agreeable way. Or simply to say that the issue is too important to you to let up on, but you’re willing to reconsider another term your investors care about as deeply.
You might think being tough and keeping your options narrows shows strength, but it actually puts you in a bad position with future business partners. They won’t look forward to working with a person who is intractable.
4) Get on the Same Page Early and Often
Miscommunication is a killer. Even if you are approaching the deal from the best, most productive place, there’s plenty of room for wires to get crossed and misunderstandings to take root. What you don’t want is to create suspicion or bad blood on each side because there wasn’t enough clarity around the conversation.
At the end of a discussion, summarize the key terms negotiated and decisions made. Ask if you’re aligned or if you misunderstood anything. And of course, there’s no shame in backtracking and asking to go over another point because you didn’t fully grasp it. Better to confirm you’re on the same page from the beginning and consistently throughout the process than at the end, when misunderstandings could create obstacles that compromise your close.
This post is part of the Hyde Park Angels Entrepreneurial Education Series, which brings together successful, influential entrepreneurs and investors to teach entrepreneurs everything they need to know about early-stage investment through events, articles, videos, and more. If you are interested in learning more about raising a round, register for “Early Stage Investment 101” on June 17.
About Hyde Park Angels
Hyde Park Angels is transforming early-stage investing by taking a people first approach. The organization is the largest and most active angel group in the Midwest. With a membership of over 100 successful entrepreneurs, executives, and venture capitalists, the group provides critical strategic expertise to entrepreneurs and the entrepreneurial community. Nearly 40% of our members have founded a company, 88% are CEO’s, top executives or corporate board members, and 100% invest in startups. By leveraging the members’ deep and broad knowledge of multiple industries and financial capital, Hyde Park Angels has driven multiple exits and invested millions of dollars in over 40 portfolio companies that have created over hundreds of jobs in the Midwest since 2006.
About the Author
Alida Miranda-Wolff heads up communications and strategy at Hyde Park Angels, crafting and disseminating the organization’s brand in all forms across all channels. In addition to single-handedly building HPA’s integrated communications plan and executing its core elements, Alida manages membership, partnerships, portfolio company support, and all community engagement.
Prior to joining Hyde Park Angels, Alida served in a variety of journalism, marketing, communications, and management roles, specializing in creating spreadable multimedia content for tech-enabled businesses at all stages. Alida has run several Kickstarter campaigns, including one of the most successful in Chicago history, and still mentors companies running their own campaigns.
Alida graduated Phi Beta Kappa from the University of Chicago in 2014 with multiple honors and awards. She remains active in the university of alumni network, serving on five advisory boards and committees. Alida is also a published author and poet, with two poetry chapbooks currently in print, Domestic Scenes and Tree Fingers.