How to negotiate with a business angel investor
You’ve nailed your investment pitch, but what happens next? Here are some top tips to help you negotiate a successful deal
When it comes to securing investment, getting your pitch right is only half the battle. Negotiating a price for your business takes only a few minutes on Dragons’ Den, but in real life it can take weeks, or even months, to finalise a deal – and one false move could cause your prospective investor to take flight.
Bill Morrow, founder of Angels Den, says: “The negotiation stage is where we see most deals falling down. I can say with certainty that 100% of the business plan valuations I see are wrong, and the disparity in expectations is a constant problem.”
Securing a result that suits both parties is crucial to the long-term health of the relationship, adds Michael Weaver, chief executive of angel investment network Beer and Partners.
“The first thing you have to remember is that a deal will only work if it’s good for both parties in terms of value. The investor mustn’t think they’ve over-paid, and an entrepreneur mustn’t think they’ve under-valued their company. You have to work together, or resentment will build up.”
To keep the investor interested, and secure a deal that suits both sides, you’ll need to manage each stage of the negotiation carefully – the following tips should help you through.
Before you even sit down at the negotiating table, you need to take the initiative. By identifying the questions the investor will ask, and getting your answers ready before you meet, you’ll begin the negotiations one step ahead.
Scott Haughton, co-founder of investor network Envestors, says: “You can pre-empt the questions by having all your accounts up-to-date, and preparing all your due diligence materials, such as contracts of employment, financial projections, property leases and sales contracts.
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“Be prepared to hand over things like bank statements, up-to-date management CVs, and details of any intellectual property, such as patents. It’s also good practice to engage lawyers to prepare a legal pack giving a two or three-page breakdown of the investment, taking into account all the common shareholder projections.”
Understand your options
A potential investor will want to see that you’re knowledgeable and realistic, so you need to show you understand the negotiation game, and the terms you can realistically expect at this stage of your business life.
Michael Weaver advises: “If you’re pre-revenue, you should think in terms of the rule of thirds. A third for the inventor, a third for the manager, a third for the money – ie the investor.
“The inventor and manager are often one and the same, so with this model you should still be left with two-thirds of the business. Meanwhile the investor, with a third, has a stake which is big enough to be diluted, and can make a significant profit on exit, while ensuring a level of influence in the early stages.”
For companies which are already trading, Weaver adds: “You should expect half of what the quoted companies [companies whose shares are sold on a recognised stock exchange] trade at. If a quoted company is trading at 15% equity in your sector, you should look at 7.5%.”
Get into the right mindset
If you’re over-assertive, or over-confident in your approach, you’ll give yourself little chance of getting the result you want. The trick is to enter the negotiations with a humble, flexible mindset, says Morrow.
“The mindset has to be that the angel is bringing more than just money – either skills or contacts – and that is often extraordinarily under-valued by the business owner.”
Michael Weaver adds: “People generally are too precious about valuation. If the business succeeds, there’ll be a lot of money around for everybody. If it fails, you’ve got x percent of nothing. Obviously you don’t want to under-sell yourself, but you need to negotiate gently.”
Choose the right venue
All the preparation in the world could come to nothing if you choose a venue which is inappropriate, or unwelcoming, and imbues the negotiations with a negative atmosphere.
According to Bill Morrow: “The negotiations should be in a neutral place where you can talk, such as a coffee shop. Alcohol should definitely not be involved, as this can polarise things, and bars and pubs can be too noisy. You’re trying to form a relationship and assess each other.
“Alcohol is actually the fourth biggest reason why our deals go awry – entrepreneurs say things they shouldn’t when they’ve had a few drinks!”
Think about delivery
When you’re actually at the negotiating table, it’s very easy to lose track of your language, both verbal and physical. But, as well as watching the investor like a hawk across a table, you need to keep one eye on your own delivery.
Bill Morrow says that: “If you come across as over-aggressive, the angel will walk away. The general tone should be friendly yet assertive, which comes down to not being emotional about the deal.
“Often we find that female business owners become very possessive of their company, and that emotion can be a hindrance. Take the emotion out of your words.”
It’s also crucial that you get your body language right. Make sure you sit upright in your chair with your hands visible on the table, and maintain eye contact. Avoid crossing your arms or putting your hands behind your head – these actions can be very off-putting!
Give the answers the investors want
When the investor asks you a question, don’t waffle or backtrack – give them what they want, even if you have to admit there’s a certain amount of risk in the investment.
Michael Weaver says: “Listen to what the investor has to say, and asks. If you can answer with relevant information, it allows the investor a degree of confidence in you. Provision of factual information supports the valuation you are talking about and any assumptions you are making, and displays your quality.”
One particularly common mistake is to slip into product-selling mode – talking about your product rather than the business which underpins it. When you’re answering questions about the advantages of your business, make sure you refer to your management team, your personal knowledge and the opportunities in your market – not just the key features of the item you sell.
Show the investor it’s worthwhile
There are all sorts of promises and pledges you can introduce to add value to your proposition, and make your pitch seem even more attractive to the investor sitting across from you.
Bill Morrow suggests: “If you’re looking for £100,000 and the investor offers you £50,000, an interesting mechanism we are seeing is ‘can you give me £100,000 if I meet the following KPIs (key performance indicators)?’ You can then agree a set of KPIs with the investor – obviously these will depend on the nature of your business.”
You should also look at tax incentives relevant to the investor. Scott Haughton urges every company to “check whether it qualifies for the Enterprise Investment Scheme, because it allows the investor to reclaim 30% of their investment from their personal income tax. Most UK private companies would be eligible.”
Start-ups should also check out the Seed Enterprise Investment Scheme, which is due to come into force in April 2012. The government is offering investors who back new businesses an income tax break worth up to 50% of the amount invested, along with an exemption on capital gains tax (CGT) under certain conditions, in a bid to boost investment in early-stage firms and kick-start the economy.
Be prepared for a drag
Don’t expect an instant result – negotiations rarely reach a swift conclusion, and you’ll need to remain patient and helpful every step of the way.
Scott Haughton says that, during the negotiations, entrepreneurs should “keep a weekly email on the state of the negotiations, detailing the latest progress. You’re courting someone who doesn’t have to invest their money, so you need to show you’re proactive and resourceful. It also shows that the process has momentum.”
From the first minute of the negotiations to the last, you need to dominate the negotiations, without appearing presumptuous or cocky. If you can bring balance to your approach, as well as to your terms, your chances of a successful resolution will increase dramatically.