How to Negotiate With Angel Investors
You have completed your business plan and financial projections for your new start-up venture. You have identified a network of investors interested in funding your new business. After a series of presentations and intense question and answer sessions, your angel investors have agreed to provide the capital you need to get your business off the ground. It is time to put together the details of the financing in a way that is balanced and meets the expectations of all parties.
Other People Are Reading
Instructions
-
-
1
Hire an attorney. If you have not hired counsel yet, now is the time. An attorney can prepare a proper subscription agreement, ensure that the appropriate securities compliance paperwork is filed, and address any general contractual obligations. If things head south and you do not have the proper legal documents in place, you may be subject to lawsuits, regulatory fines or lose control of your company.
-
2
Offer terms. The angel investor is going to want to know what he is going to receive in return for the funds invested. It is up to you to propose an initial term sheet outlining what percentage of the company the investor will receive, structure of principal and interest payments and operational involvement. The terms must be fair and attractive to the investor as angel investors expect this due to the risk. However, the deal should also protect your interests as well and allow you the flexibility to use the capital as you see fit to expand the company.
-
-
3
Negotiate. A sophisticated angel investor will likely ask you for additional concessions. The investor wants to get the best deal available, particularly since he is taking on a great deal of risk investing in a start-up. The investor may ask for a greater stake in the company, suggest to put up less capital, demand immediate principal payments or even ask for a seat on your company's board of directors. Be prepared to negotiate with the angel investors and offer up some concessions, especially if they do not fundamentally alter the deal.
-
4
Accept. Particularly in a start-up venture, you will likely have to give up a little more ownership than you want and embrace the angel investors request to sit on the company's board. After a round or two of negotiation, be prepared to accept the funding and proceed with operating your business. A start-up business with zero capital is not going anywhere. If the negotiations have reached a natural plateau, take the deal and avoid drawing the process out for weeks or months -- time that can be better spent building your business rather than fighting over details.
-
1
Tips & Warnings
1. Consider accepting less money or structuring as a loan if the angel investors are asking for more equity than you are comfortable giving away.
2. A combination of equity/debt financing may be attractive to angel investors and allow you to keep more of your company or raise additional cash. The investors earn interest payments until they are ready to convert the preferred stock to common stock equity.
Federal and state departments strongly regulate the sale of securities/stock in your company to investors -- make sure you adhere to all laws.
References
- Photo Credit Michael Hitoshi/Digital Vision/Getty Images
