With a quick glance over any of the top tech stories, it seems like securing money from investors has become the ultimate way for consumers and VCs alike to measure early success. And the peanut gallery may not be wrong. Crunchbase News reports that raising between $7 million to $9 million maximizes a startup’s chances of achieving a successful exit. And while funding is important, understanding how to negotiate with investors is increasingly important.
Raising venture capital money has become an art even the most skilled negotiators may have trouble navigating. Carefully managing power dynamics is crucial to getting the terms you want and need. The future of your company must be built on careful VC negotiation with the ultimate goal of a fair end agreement and, hopefully, a new partnership.
Here are some tactical tips on how to successfully negotiate with investors to build a relationship and your business:
Money Isn’t Everything
Don’t underestimate the importance of trust a venture capitalist places in VC negotiation. Avoid miscommunications with a clear articulation of expectations and timelines.
After an investor meeting, summarize the main points made and the proposed or negotiated term sheet to make sure all parties are on the same page. Asking follow-up and clarifying questions will avoid misalignment later and will demonstrate your interest to the investor at hand. Avoid confusion with follow up questions. Asking clarifying questions will demonstrate your interest, but will also build trust between you and an investor.
Deepak Malhotra, a professor at Harvard Business School, outlines a telling story in his article about a venture capitalist who was uncharacteristically disengaged in one of his portfolio companies. When probed, the VC explained that when negotiating the deal the founders squeezed investors to a minimal equity stake even though the investors explained that his firm would bring mentoring, strategic advice, networking, and the like to the company.
Although the deal was ultimately worth doing, the investor didn’t feel any responsibility to provide the founders with additional assistance.
Investors are looking for someone who is looking for more than just money. They want to invest in someone passionate about their mission and their business, and who is looking to forge a partnership.
Build trust by not just focusing on more than just the monetary value an investor will provide will help build trust between you and the VC. In fact, cultivating a partnership with your investors is crucial to your business’s success. Investors have seen successes and failures alike and can be incredibly valuable resources and best advocates.
Listen to Learn
The first step to VC negotiation is to listen and wait. Never show your term sheet first. Wait to see what the investor offers before posing your thoughts and terms. With that in mind, listen closely to what your concerns and excites your investor about your business. Both can be key indicators of your company’s strengths and weaknesses.
Not only does listening also build trust, asking questions and understanding an investor’s position will make you a more shrewd negotiator.
Assess an investor’s faith in your team and company by the terms he proposes. An investor who hones in on board-seats, voting rights, or other controlling terms may be “less confident in the management team and is perhaps thinking ahead to when it will be replaced.” In comparison, an investor may indicate her optimism about the future of the company by fighting for full participation rights.
Determine if an investor will act in your best interest and will be a good partner. Ask questions around their enthusiasm for your company’s mission, and their strategic involvement style. Focus on selecting a partner that will help you when hardships and unforeseen obstacles inevitably arise.
Come Prepared for a Partnership
We cannot understate the importance of preparation. Come to investor meetings with a plan. Although you want to wait to see what investors will offer you first, draft investment terms before the meeting.
Before the meeting, know which terms you will not compromise on as well as the terms that are more flexible negotiating points.
Just like you wouldn’t come to a job interview without having completed your research, a successful negotiator will have done their research to understand the investor as best as possible. Look through their Crunchbase profile to see if they’ve invested in your sector, stage, or even a competitor. Skim their Twitter accounts or blog to get a complete picture of their biases, interests, and curiosities.
Coming fully informed to meetings can inform your VC negotiation style. Your understanding of their strengths and weaknesses helps establish a rapport.
Leverage Your Advantages
A critical part of being a successful negotiator is to leverage your advantages. Additionally, this includes even leveraging your lack of power.
Studies show that having power reduces a person’s ability to be empathetic and understand how others think. Being in a less powerful position gives you a complete understanding of the investor’s desires. It can also help you appeal to what they want.
Have a lot of options when choosing an investor? Use this to your advantage to fight for the terms most important to you.
Don’t have a lot of investor attention? Ground investors in the fact that diluting your equity too far will likely cause top talent to leave and will act in neither your interest or theirs. Framing it as a loss on everyone’s part will reorient the conversation.
Lastly, Jeff Weiss, a partner at Vantage Partners explains to Harvard Business Review that when you carefully listen and prepare, you’ll frequently discover you’ve “underestimated your own power, and overestimated theirs.”
Sources:
Deepak Malhotra, Harvard Business Review: How to Negotiate with VCs
Under 30CEO: An Insider’s Guide: Negotiating with a Business Angel Investor
Martin Zwilling, Forbes: Don’t Let Investor VC Negotiations Kill Your Startup
Carolyn O’Hara, Harvard Business Review: How to Negotiate with Someone More Powerful than You
