Dealing with experienced investors is among the most daunting tasks that a young entrepreneur has to face. They know the ins and outs of the negotiation process, speak technical jargon fluently, and normally have the upper hand in any decision-making. While they have years of experience and investment prowess, chances are that you — young and idealistic entrepreneur— probably don’t.
Some CEOs want to avoid this process for as long as possible, choosing instead to bootstrap their startups with the help of friends and family. If they’re lucky and are able to acquire a solid customer base, they might just establish a profitable business without needing a compromising investment check.
For most startups, however, a conversation with investors will eventually need to happen.
We spoke to a number of start-up founders who have successfully negotiated with investors, to see what advice they have to offer.
1. Pick The Right Partner
If you have various options, pick a partner from the investment firm who has been an entrepreneur. Someone who built a company with tens of millions of dollars in revenue, Someone who will be on your side during tough times. Building a company is not an easy job, you make mistakes, many small ones, a few big ones, and hopefully zero fatal ones. Many times your strategies will fail, and sometimes you might loose someone from your core team, and it is those times that you want maximum support.
2. Remember All the Variables
It’s essential to have a few different negotiable variables on the table when talking to potential investors. Mostly, founders just consider the valuation as the most important aspect, forgetting that things like share classes, strategic value, and the nature of funding are important too.
In regards to share classes, it’s better to keep one class of common shares throughout the angel and seed rounds, which helps generate more interest from investors when heading into Round A and beyond.
3. Know What Your Business Needs
Never forget what your business needs. If your business needs the capital to keep going, or to hit your objectives, then you need to be flexible with terms. If you don’t need the money right away, you’ve got more flexibility. The most important thing is getting your startup where it needs to be.
Preet Anand, BlueLight
4. Honesty is the Best Policy
Be completely open and be honest with everything. When they ask questions, do not tell them what they want to hear, tell them the exact answers and tell them directly.
John Kagit, Socialeyes
5. Remember That Time is Money
Try to not lose too much time. Attempt to be as complete as possible in every pitch and be totally available to investors for any inquiry they might have, but only for a short period of time. Then ask them directly if they will fund or not. It is that easy. If they are not handled properly, funding rounds can go on for a VERY long time, and this could result in lack of focus, and most importantly, large amounts of lost time and opportunities.
Franco Puppo, Tabletize