The Art Of Negotiating With Investors As A Startup
You may not believe that you have a great deal of leverage if you are trying to negotiate startup funds out of an investor. The truth of the matter is that your ideas are just as important as their money. You just need to understand how to present your ideas, hold your ground and play the game. Here are some of the basics of the art of negotiating with investors as a startup.
1 – Practice the essential presenting skills
Before you go into your meeting with investors, you should have ripped your presentation to shreds beta testing it with each other. The presentation of your business is just as important as the business itself. You should have auditioned your pitch to each other and to trusted friends a number of times before you ever see an investor.
During this preparation, you will be able to streamline your pitch to the point that you are never interrupted by your audience. They will be kept in rapt attention. You will be able to answer any question. You will have asked it to yourself three times before any investor gives it to you.
Everyone in the meeting should be well versed in how to both present and negotiate. If not then consider looking into investing in an external consultant or negotiations training to help you prepare, because a lost investment deal could cost you hundreds of thousands of dollars.
2 – Have a BATNA ready to implement
BATNA stands for “best alternative to a negotiated agreement.” It means that you always have a lifeline outside of the current negotiation. In the case of most startup firms, this means some sort of self-funding. Even if you have to scale down, the best alternative is always to create your own best agreement. If you cannot get the terms that you want, then you always have the BATNA to fall back on.
Your BATNA also serves as your bottom line to negotiators. This is not a document or a philosophy that you necessarily share with your negotiators on the other side of the table; however, it should always be on your mind as you negotiate. The BATNA will also serve as the line in the sand for your group if you have more than one founder with different ideas.
3 – Be prepared to deal with around 20 separate terms from a reputable VC
You may be excited by the wild valuations that you hear about standout tech companies such as Facebook or Twitter. The truth is much different in the real world: Most valuations have been quite steady between the US $2.5 to 3 million range for the past three years. In order to get this kind of valuation, you must usually fulfill a list of around 20 “demands” that your VC will give you.
4 – Invest in a great lawyer
You will need a lawyer who understands the ins and outs of venture capital specifically. There is no other animal that is quite like it, and just because you know your brother’s wife’s neighbor’s husband is a lawyer for some kind of business does not mean that you should use him for your negotiation.
Most of the lawyers who are well known in the VC world are quite well known. You can look up their records online. Find the people who have done business for companies like yours and use them. If you have to pay more for them, do so; it will definitely be worth it in the long run. It is better to pay your lawyer a large flat fee upfront than to end up with a bad deal with your VC owning the majority of your company.
If you have the right people and the right plan on your side, then negotiating with even the largest venture capitalist or angel investor will be less intimidating. Your ideas are great, so take the next steps to ensure that the people with the money know it.
The art of negotiating is an art indeed. Be sure that you have all of your ducks in a row so that you can focus on the things that no book can teach you about negotiation, such as body language and timing.