Negotiating with Investors

“For you, negotiating with investors may be a first. Having a third party help you certainly makes it easier.” 

If you have never raised money before, doing so is an art. It requires various approaches to messaging, process and communication that compel an investor to say, “I want to invest in that company and that leader.” The perspectives in this section may not be comfortable, but they will change the investment process from one that controls you to one that you control. While business fundamentals are usually what dictate whether investors invest, your presentation and demeanor can have an equal or greater impact.

• Make Investors Put Skin in the Game.The normal investment process includes signing a letter of intent when the investor has decided to invest. While the letter of intent sets valuation and the terms of the investment, it does not commit the investor to invest. The investor can pull out without liability. However, the letter of intent normally includes provisions that severely limit you in the form of an “exclusivity” period of anywhere from sixty to 180 days during which you cannot negotiate with any other investor. Sounds like a bad deal. You are tied up and they have no obligation to close. Your leverage is completely gone. To overcome this, have the investor put some skin in the game with the following deal structure.
  • Put up Money Upon Letter of Intent Signing. Have them make a meaningful portion of their investment, say 20 percent, as a loan to the company on the date of signing the letter of intent. This is done through a simple loan agreement that will make them the senior creditor of the company. The loan agreement includes a provision that states “that if the investment closes, the loan converts into equity at the valuation stated in the letter of intent.” If the investment does not close, the loan stays in place and the investor is the senior creditor of the company.
  • This Changes Leverage. This accomplishes many things.
    • First, the investor puts some skin in the game. When you have some of their money, they are more likely to close the full investment and negotiate fairly.
    • Second, even though you will be subject to an exclusivity provision, you are doing so when they have already given you some money. Next, they are motivated to move quickly since you have their money.
    • Finally, it provides the investor with security because they are the senior creditor of the company—senior to any other loans or other equity investments that might come. If the investment does not close, this protects them.
• Establish an Investment Process and Do Not Deviate From It. Communicate your process and timetable for your investment process. Regardless of the investor, do not deviate from the process. When you set a process and stick to it, and are not willing to deviate, this sends a message to investors that you are considering multiple offers. They must decide either to participate or not participate. When you deviate, you send a message to the investor that they have leverage. This will move them to make decisions – to invest or not invest – on the timetable you need. Parties vying for your business should understand that they are competing with others.
• Interview Your Investor. State your criteria for an investor. “We are looking for an investor who has experience in the space, invests from $5 to $10 million, focuses on SAAS companies, takes a minority interest and has an investment time frame of three to five years.” When they sense you are interviewing them (which is part of what you should be doing), they sense the confidence of a leader who knows how to handle the business’s needs and is going places.
• Be Careful Sharing Information. When you are under the pressure of being the entrepreneur, and you build a relationship with constituents like potential investors, you tend to share the gory details of your business. While this can let air out of your balloon, this can also be detrimental to the business. When investors hear a sense of desperation or a risk to your business, some may use this information as leverage.
• Investors Should Never Know They are Your Best Prospect. They need to understand if they want your business, they need to act to take advantage of it. Think you are being deceptive? Think of it this way. Do you think that if you asked your investor, “Are we the only investment in this space you are considering?” And if you were, they would say, “Yes you are.” Please.
• Be Willing to Take Less If Valuation Isn’t Right. Set a plan for a larger investment amount and state that you will take a lesser investment if the valuation does not meet your expectations. This shows belief in your vision and that there are multiple paths to get there. You, not them, are setting the criteria you want in an investor. When you do that, make sure you have a plan for the lower investment amount. The first thing they will say is, “Great, can we see the financial model for that plan?”
• Attitude. Sometimes your attitude, body language, and tone can be compelling enough to create leverage. Shift your passion for your vision into a natural confidence. Communicate that the success of your business is not a matter of “if ” but “when.”

You must present your business and team as the right opportunity and deliver your message with clarity, confidence and creativity. Following these perspectives does just that, and allows you to put your best foot forward even when you feel like you are going backwards. Closing an investment is never easy. Develop and enhance these skills to improve your chances of securing an investor who is both willing and worthy of your business.