Negotiating

Negotiating is a step that many new angels believe will take up a large chunk of time. This process requires each party to make assertions of their desired terms and find a mutually beneficial agreement. Depending on your level of experience these proceedings can take many forms and can either lead to positive relationships or negative ones. This step should be taken as a chance to build a positive foundation that a future of business dealings and success can be built off.

               There are two main schools of thought surrounding negotiations. The first is that negotiations are key to understanding the intentions of the entrepreneur and clearly defining your own part to play in the venture. These people look at the venture’s structure, price, required capital and the role they are expected to play and build the contract around this. The second approach is the avoidance of negotiations all together. This can come in a few different forms but ultimately seeks to save time and avoid putting unnecessary strain on the new relationship. Entrepreneurs in early stage investments are often very emotionally attached to their venture and thus might become defensive or hostile when confronted directly. These negotiations might also take up a significant amount of the investors time that might be better spend pursuing other opportunities or learning about the industry. These entrepreneurs often believe that the price and terms are not significant in the overall scope of the deal.

               When it comes to negotiating terms, there are several ways that one can go about it. In the book “Winning angels, the 7 fundamentals of early stage investing”, David Amis suggests 3 methods that are often taken by angels that are seeking to quickly move onto later investment stages. The first of these is the straightforward and direct method. This method calls for active participation and clear language that will lead to either a deal or a clear resolution to the meeting. The most extreme form of this is the one time offer method. This method gives an opportunity for a quick close without the strain that comes from a hostile conversation. This method does place a lot of pressure on the entrepreneur and thus the total scope and context of the deal should be understood before offering. Finally, the negotiation through a third party can be a great method to avoid the time constraints that negotiations can bring. Though many angels chose not to negotiate, those that do are more likely to play an active role in the future of the business.

               When considering whether to invest, one should sort out their priorities and decide what they are seeking from the deal. In the case of many investors, the deal itself is less relevant than the potential expansion of one’s network. Respect among the entrepreneur and the investor will help facilitate a positive environment and prevent future snags due to perceived slights. It is important that both the investor and the entrepreneur feel as though they are getting a good deal. Finally, Amis recommends closing the deal quickly. The longer that a deal takes to close, the more likely it is that one or both parties will walk away dissatisfied with the results. Whether you negotiate or not, this stage is key because it is often the first direct interactions between the investor and the entrepreneur. Using the previous steps is key to narrowing down the field but this step is where the future is either build or destroyed. Greed should be discouraged from both parties and these negotiations should be a test run to see whether a business relationship will be sustainable or not.