The Proactive Entrepreneur: Negotiating Your Startup for Success
Originally published on The startup Magazine, by Dr. Emad Rahim
Now that you have finally set up your company and are ready to operate, don’t make the mistakes that tens, if not hundreds, of eager entrepreneurs have made before you.
Whether it is a lawsuit for copyright infringement, enmity with investors or disagreements with co-founders, many things can derail a startup — even before…it starts.
At the end of the day, you, as an entrepreneur or startup founder, have to negotiate with many business partners. These people are your partners, not your enemies, so try your best to negotiate operational terms that are fair to all parties.
Here are our top 10 negotiation tips for entrepreneurs, and we have categorised them to make it easier to apply.
Whatever you do — and we’ll never repeat this enough — make sure you have the right counsel and enlist help from a finance expert and tax connoisseur.
Negotiating with Co-Founders
Unless you are the sole founder of your startup, you will need to negotiate ownership terms with other people, your co-founders.
Make The Equity Agreement Clear
The equity agreement is the document in which you set the ownership terms for your company. Make sure each co-founder reads the document, understands it, and is comfortable with its content.
Discuss this document offline before requiring each partner to sign it.
To make it easier, experts recommend you set ownership stakes proportionately to the number of partners — for example, 50% each for two partners, and 33.33% each for three partners.
Set Reasonable Terms on Profits and Losses
Ownership stakes are different from allocation percentages for profits and losses. If in your case they are the same, make sure to specify it.
Normally, your lawyer should take care of the writing, but make sure you discuss the terms with other partners beforehand. Equity and profit-and-loss stakes are important for legal and tax purposes.
Negotiating with Employees
Your future employees will be the heart of your startup — so treat them fairly.
Set Competitive Compensation Rates
Research your industry and set compensation terms that are competitive yet don’t break your bank. Explain to potential recruits that the startup has a strong product or service and is poised to grow in the next few months or year.
Include Alluring Benefits, Perks and Equity
For a small business, perks and equity are magnets to dangle in front of potential recruits. Perks can be anything from free lunch to company transportation, casual dressing, and working from home.
The bottom line is, you want to save as much as cash as possible, because, well, you just don’t have the cash.
Establish a Clear Process for Performance Evaluation and Promotion
Another way to successfully negotiate with new hires is to explain how the performance evaluation works.
Tell them what they can expect if they perform well, as well as the financial and hierarchical advantages that come with stellar performance.
Negotiating with Suppliers
You need suppliers to survive operationally, so find the right words and legal agreements to lure them in.
Give Vendors Equity
Many suppliers are wary of extending credit to new companies — which is bad because that is exactly what you need: credit.
Talk to select suppliers, especially those that are critical to your business, and offer them corporate equity. Make sure you discuss the terms beforehand with your co-founders, though.
Promise Exclusivity over a Specific Period
You can also hook a supplier by promising exclusivity over a specific period, which can run from a few weeks to a few months or even years.
The goal is to ensure the vendor falls for the guaranteed revenue, and decides to extend you credit over a time period long enough for you to breathe operationally and deploy your business strategy.
Negotiating with Investors and Lenders
Lenders and investors are the money people — so court them properly and patiently, listen to them and heed their words. In anything you sign with these people, however, make sure your counsel is present.
Allocate Attractive Equity to Investors
Equity investors generally like to have…well, equity stakes. That makes sense, right? But make sure you don’t sell your company out too cheaply by giving financiers generous equity portions. Remember that if you no longer hold the majority stake in your own company, it no longer is yours! Seek counsel from your lawyer to determine the right financial threshold, percentage-wise, you should cede to financiers.
Sign Hybrid Financing Agreements with Lenders
Sign a hybrid financing agreement — that is, equity ‘giveaway’ and loan repayment — to attract lenders. Also, diversify your lender base, from traditional banks and insurance companies to unconventional financiers like pension funds and the federal Small Business Administration.
The goal is to borrow at reasonable rates, so you don’t end up paying too much — if not all — of your future profits in interest.
Show a Detailed Business Plan
The best way to convince lenders and equity investors — but others as well — is to write a detailed business plan that demonstrates the viability of your startup.
For this also, don’t hesitate to hire a professional, especially is business writing is not your forte. The investment is worth it because you can use the plan to assuage the operational and cash-flow concerns of many partners, including lenders and suppliers.
Take-Away
Negotiation skills take time, dedication and preparation to polish and master.
But if you do your homework, surround yourself with experts, and present things in a fair and clear way to your business partners, you are more likely to succeed.
Remember that an effective startup negotiation strategy includes everyone, from employees and suppliers to lenders and equity investors.
Originally published at thestartupmag.com on August 4, 2015.
