To negotiate or not to negotiate? The question every investor will face at some point during the process of getting a deal done. There are many aspects to be considered when deciding if and how to negotiate. However, one of the most important things to consider is how will the negotiations affect the relationship between the investor and the entrepreneur. Starting off on the wrong foot could be detrimental to a business opportunity.

 

Negotiating can be a very emotional process, and therefore, many investors prefer not to risk souring a relationship with an entrepreneur over negotiations. So how do these investors ever strike any deals if they aren’t negotiating? The authors of Winning Angels lay out a few options. One, they let someone else do the negotiations for them. Outsourcing this responsibility to an attorney allows the investor to shift any ill will to the attorney as opposed to coming off as greedy. Another option is they leave it up to the entrepreneur. If the entrepreneur proposes a fair deal, then they accept. If the investor doesn’t like the proposed deal, they simply decline the opportunity and move on. A third option is the investor doesn’t care much about the financial aspect at this early stage time. They will accept any reasonable terms presented by the entrepreneur because they want the entrepreneur to feel good and remain motivated to win. Sometimes the investor may also wait until later and more significant investment rounds to negotiate terms. Although it seems crazy to invest money and not negotiate terms, all of these reasons help to justify those decisions.

 

On the other hand, some investors view negotiating as very important because it is an opportunity to further evaluate the personality, characteristics and values of those you may be going into business with. You are not going to want to go into business with an entrepreneur who is more focused on being greedy and striking the best deal for themselves. And same goes for the entrepreneur when deciding whether an investor is the right partner or not. Negotiations can bring out the true colors of individuals so it can certainly be used as a vetting tool. You also don’t want to go into business with someone who can’t handle a little pressure and find a way to problem solve without getting their feelings hurt.

 

At the end of the day, there are multiple ways to go about the negotiation phase of sealing a deal. If all parties go into the process with a fair and realistic bargaining range, then it seems likely that a fair deal can eventually be made. And sometimes the best deals are the ones that aren’t done. Not every potential opportunity has to be carried out. Knowing if and when to walk away from the negotiating table is an essential skill to have.

6 thoughts on “Angel Investing: Negotiating

  1. Victoria Price says:

    Zach,

    I agree that negotiating is likely a touchy and emotional process but I really appreciate and agree that it can be an opportunity to further evaluate the entrepreneur and their product/service. It can show how a person might handle problem solving or tense situations and that could equate to how they might handle similar situations in their business. It can also show an entrepreneur if the investor is somebody they want to be partnered with or not. Like you said, it can allow people to show their true colors.

    Great read,
    Victoria Price

  2. Joseph Rudy says:

    Zach,
    Negotiations seem to be a personality thing. As you mentioned, it seems that many angels will use it to “assess” their entrepreneurs. In contrast, others avoid negotiation like the plague. Personally, I feel that I would not negotiate as the relationship would be paramount in my mind. Instead, I would screen investment opportunities and only accept those that are fair straight from the start. If someone (the entrepreneur) is unwilling to offer fair and upstanding terms from the beginning, I want nothing to do with that person—just my personal opinion.

    Joe Rudy

  3. Hi Zach,

    Great discussion and some things really resonated with me on this one. If I were an investor, I would probably be more inclined to engage in mild negotiations just to get a feel for the type of person I am dealing with. I think sometimes people tend to put their best foot forward initially, which isn’t a bad thing, but a healthy dose of negotiating might weed out someone with less desirable characteristics. But I have a tendency to take everything someone says as “gospel,” which hasn’t always worked out well, so it has made me more cautious in business dealings and life in general. That being said, I can also see the importance of outsourcing negotiations or taking the deal at face value after careful research. From what I see with our readings, it seems there is not one unilateral way to make these decisions.

    Cheers,

    Taylor

  4. Hi Zach,

    Great discussion and some things really resonated with me on this one. If I were an investor, I would probably be more inclined to engage in mild negotiations just to get a feel for the type of person I am dealing with. I think sometimes people tend to put their best foot forward initially, which isn’t a bad thing, but a healthy dose of negotiating might weed out someone with less desirable characteristics. But I have a tendency to take everything someone says as “gospel,” which hasn’t always worked out well, so it has made me more cautious in business dealings and life in general. That being said, I can also see the importance of outsourcing negotiations or taking the deal at face value after careful research. From what I see with our readings, it seems there is not one unilateral way to make these decisions.

    Cheers,

    Taylor

  5. Hey Zach,

    One part of the negotiating section that I read was where the angels who negotiated were more than likely going to have an active role in the opportunity, which made sense to me; I would want to arrange something more than usual if I was going to be involved on the board or operations of the business, and I agree with you that it does give one a chance to get to know whom they are potentially going to be doing business and filter out greedy prospects.

    I encounter a variety of different business owners within my career. However, some do not like to waste their time or emotions negotiating, either you fit their budget, or you do not, and I can appreciate this type of approach in business as well; I think it all falls back on personal beliefs/strategies towards saving time, relationships dependent on the kind of opportunity, and involvement in the investment.

    Best,

    Stokes Warren

  6. Zach:

    I like the point you make that the negotiating process can get very emotional. Both sides may have conflicting objectives, such as when an entrepreneur wants a high valuation, but the investor prefers a lower one. It is easy for people to feel cheated or being taken advantage of in these types of transactions. I found it amusing that one of the suggestions was to have someone else handle this process and not get involved. Preserving the relationship one has to built between entrepreneur and investor is wise if the job still gets done.

    Adam

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