Updated: Jul 4, 2022
As an entrepreneur, there’s a lot riding on the outcome of your negotiations with potential investors. Here are a few tips that will help you avoid some of the most common blunders:
First, know what you really want. Make sure that you can clearly articulate the things that really matter to you – and these should include the questions about the amount of money that will be invested as well as control of the business. Don’t get stuck in the details. A few compromises are just part of the game but be sure that you know exactly what you want when it comes to money and influence. Moreover, set your own limits and know when to walk away from the negotiation table.
Second, knowing the VC’s targets and limitations helps you to develop a more nuanced strategy. Study your negotiating partners in order to recognize and respond to their styles.
Third, don’t trick your investors, transparency is key! These early negotiations are the foundation for long-lasting business relations, so both parties should ensure a positive outcome for everyone.
Fourth, discuss the possibility of investing with multiple potential investors. You can gain the upper hand by piquing the interest of several investors and letting them know there’s competition. However, never divulge the names of competing investors or the term sheets they’ve drafted. Doing so could allow them to collaborate and force you into a bad deal.
Fifth, if you don’t know what to do or say, then wait for them to act first. When you enter negotiations, no one knows exactly what the other wants, and it’s better to let the person on the other side of the table reveal her hand first. For example, always let the investor be the first to draft the term sheet. It’s possible that she might offer you something better than you might have realistically offered yourself, so let her play the hand first.
~ Excerpts from Venture Deals
by Brad Feld & Jason Mendelson