Finding investors who want to fund your company’s growth is great.
But if the terms they offer you aren’t good, then you have to pass. For instance, if they want to take 90% of the equity of your company, or control 100% of your Board Seats, then you lose too much control.
In this article, you’ll learn two simple strategies for getting more favorable terms when negotiating with investors.
Strategy #1: Create a Bidding War
The best strategy for getting favorable terms is to get multiple investors interested in your business.
You’ve probably heard the phrase, “he who has the gold makes the rules.” This is particularly true in investing. The investor has the gold and thus makes the rules in terms of what type of deal terms they’ll give you.
The best way to get the terms you want is to get multiple investors interested in funding your company. Then, you can essentially create a bidding war. For instance, if one investor says they’re willing to give you $3 million for 40% of your company, you can ask the other investors if they’re willing to beat that deal (e.g., give you $3 million for only 30% of your company). Once they do, you can go back to the original investor, and so on.
The more interested investors you have, the easier it is to create a bidding war and to better negotiate because you have other options. When you have no other funding options, it’s very difficult to negotiate.
Strategy #2: Have a “Ringer” in Your Corner
The second key strategy for getting favorable deal terms is to make sure you have a “ringer,” that is someone on your side who has successfully negotiated investment terms in the past.
This person could be a lawyer, an investment banker, or other advisor who deeply understands each of the deal terms. For instance, if they don’t fully understand “equity dilution” or “stock options,” they can’t help you get the best terms.
Ultimately It’s the Raising of Funding That’s Key
To reiterate, you will receive the most favorable funding terms by 1) getting as many interested investors as possible, and 2) having someone on your side with a track record of successfully negotiating investment deal terms.
Ultimately, though, keep in mind that raising funding, and not deal terms, is your primary goal. Since, for many businesses, if you don’t raise funding, you’ll never launch or grow.
Always consider this question: would you rather own 50% of a company that’s worth $10 million or 100% of a company that’s worth nothing?
So, keep this ultimate goal in mind. But clearly, try for the optimum solution which is to raise the funding you need with the most favorable deal terms.
Negotiating with Investors Infographic
Below is an infographic of this article for quick reference.
To further help you negotiate with investors, we put together the slide presentation below to show you “The 10 Most Common Mistakes Entrepreneurs Make When Raising Venture Capital” so you can avoid them!