Investment Negotiations – How to state your terms to potential investors

When setting out to negotiate with investors, there are many aspects to be considered, and tact to used, which we learn along the way. We have to know what works with investors and what does not during the course of investment negotiations. When starting a small or medium business, one may come across and may have to deal with potential lenders including venture capitalists, angel investors, friends and family who are willing to lend you money for your business. Hence your process of negotiation needs to be refined to suit each group or individual.
We offer certain tips which will be useful when you are facing an investor and want to state your own terms during the negotiation process.

Take advantage by making your own term sheet
In almost all negotiations it is the potential investor who lays down the terms and makes a list of what he expects or demands. This list also known as a ‘term sheet’ and it is the starting point of the negotiations, which later becomes the document on which the legal agreement is based. The term sheet is more of an expression of interest and it is in no way a legal obligation and does not bind the borrower in any manner. It is also a good sign that the potential investor is serious about funding. If your business is projected to grow fast you are actually in a position to dictate terms to some extent. You can turn the tables and offer prospective investors your own terms and conditions. This is, no doubt, a daring strategy but it has the dual advantage of accelerating the process and discouraging investors who are not so serious.

Find your place in the value system
The term sheet should quickly and clearly spell out the value or the price of the business stock. This way it is easy to identify investors who are on the lookout for unfair bargain- valuations. It is usual for such investors to state that the valuation quoted by your business is too high. Such investors should be avoided as far as possible. However, if the entrepreneur starts talking about valuation right from the beginning itself, it will not go well with the investor. If you have no idea at all about the valuation, that would be a total turn-off for the investor. In the normal course of events, the assessment of where you are in terms of value comes up in the second round of investment negotiations.

What are the contents of the term sheet ?
Term sheets usually contain more than just the valuations and prices. If you are an experienced negotiator you can use the term sheet to bargain for other aspects and parameters and examine such situations like bankruptcy. These terms rely on a larger economic scenario. In boom time, it was the entrepreneurs who dictated most of the terms which were accepted by the eager investors. These days, investors demand and get what they ask for. Since terms are dependent on market conditions the business owner should have a good idea of what is going on in the current market so that the best terms may be negotiated.

And remember that it is wise to keep a level head which is the most important factor in closing an investment deal. One has to be practical, pragmatic, humble and modest to an extent, which will bring the funds into your account and give a fresh boost to your business.

Entrepreneurial Learning
When setting out to negotiate with investors, there are many aspects to be considered, and tact to used, which we learn along the way. We have to know what works with investors and what does not during the course of investment negotiations. When starting a small or medium business, one may come across and may have to deal with potential lenders including venture capitalists, angel investors, friends and family who are willing to lend you money for your business. Hence your process of negotiation needs to be refined to suit each group or individual.

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