How to negotiate with investors
How to negotiate with investors
Learning to negotiate with investors will help you secure the best possible deal for your business. Your investor will try to strike a hard bargain – remaining strong but being flexible is key to success.
Debt and equity
If you’re struggling to agree on an equity stake, consider taking on a proportion of the investment in exchange for debt. This could be either common debt, repayable under specified conditions, or debt that converts to equity once the company reaches a certain level of profitability. Debt is attractive to investors as their repayments will often get prioritised. Speak to an accountant when considering these options as taking on investor debt can change your tax requirements substantially.
If the equity stake demanded is too high, you may wish to consider staggering investments to secure more money for less equity. Whilst businesses with established operations and sizeable turnover can negotiate equity stakes down, start-ups with little value will find it hard to sway investors. Taking a smaller amount of finance for a lower equity stake, then taking on greater amounts of finance when the business is more established, can help start-ups get what they require without giving away too much of the company.
Work with multiple offers
If you have investment offers from multiple places, you’ll find it far easier to negotiate. Choice provides breathing room, which investors know. If they are your only option it’ll be easier to force you to take a less favourable deal. With multiple offers you’re able to play investors off against each other to drive up the money offered and drive down the equity stake. Keep all negotiations open until you sign on the dotted line; creating a new deal is always possible.
No matter how heated the negotiations become, remain professional at all times. Investors expect business owners to want a good deal, but they won’t stand for rudeness or unprofessional attitude. Remember they are businesspeople looking for the right investment terms. Be assertive and confident, outlining your needs non-aggressively. How you handle the negotiation process gives an indication of how you’ll cope when running the business becomes complicated.
Everything is negotiable
When securing investment, all terms and conditions are negotiable. Never be fooled into thinking something is ‘standard’ or ‘normal,’ because conditions are made on a case-by-case basis. Investors that won’t back down on equity may be willing to compromise in other areas, such as the time and expertise they’ll provide to the business. Discuss each aspect of the investment and try to find a mutually-agreeable middle ground on each one. Don’t make the mistake of concentrating solely on the financials; investors can bring other benefits to the table.
Know your investor
Know your investor like the back of your hand. What ROI do they look for? What terms have they invested on in the past? Are they impulsive, careful or shrewd? These types of questions can help you focus your negotiations more effectively. You should aim to work with your investor rather than against them. If they often shy away from investments that meet certain criteria, ensure your case eliminates their worries whilst also producing a mutually-agreeable result. The personal touch can make all the difference.