Fundraising is one of the most critical and impactful parts of running a startup. How well you negotiate can make a huge difference. So, what negotiation tips can you put into play to optimize your funding?
Sometimes it may just feel like you need more cash, immediately, at all costs, from any source. Yet, poor funding terms, from the wrong investors can also not only make it harder to operate and bring in future funding rounds but can destroy everything you loved about this venture in the first place.
Here are how to think about negotiating and some of the plays you can make in the process to close the best terms in this round and give your venture the best possible future.
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. Don’t Take The First Offer
- 2. Shop Around
- 3. Think Beyond The Money
- 4. Negotiation Is A Learned Skill
- 5. Everything Is Negotiable
- 6. You Won’t Get A Break If You Don’t Ask
- 7. Negotiation Trends & Styles Change Over Time
- 8. The Style That Works Best Depends On Who You Are Negotiating With
- 9. Equip Yourself With Knowledge In Advance
- 10. What’s Your Top Three?
- 11. Start High, Know Your Boundaries
- 12. Understand That Everyone Wants To Win Something
- 13. Multiple Choice Options
- 14. Don’t Be Attached To The Outcome
- 15. Have Other Options For Yourself
- 16. Listen A Lot
- 17. Ask More Questions
- 18. Limited Time Offer
- 19. Summary
Don’t Take The First Offer
Don’t be foolish and stubborn and turn away precious startup capital when you really need it. Sometimes financing is tight, and you need to take the money to survive. Yet, you can also still make every effort to seal the best terms by negotiating intelligently.
Especially when it comes to inbound offers, it can pay to say no. If the money and investors are chasing you, then you know you have some negotiating power. You have something of value that they want a part of.
Sometimes just holding out will yield a voluntary, better follow-up offer.
Once you do start getting interested in funding your startup, then don’t be afraid to shop around.
One of the best ways to ensure you are getting the best deal on anything is to shop and get multiple offers.
Then take those offers and see who will match or beat them.
This can be especially powerful after you’ve landed a strong lead investor.
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Think Beyond The Money
Valuation and even the cash itself can play distant seconds to the terms and other elements of an investment agreement.
There are many terms that can be very impactful on your ability to run your company, make decisions and even stay a part of it. This can especially apply to your ability to raise money in the future, and how attractive your company will be to investors then.
Savvy entrepreneurs are always thinking about and positioning for the next round before they close the current one. This includes being careful what investors you allow in, and picking the right individual partner who wants you to succeed and will go to bat for you, especially in a pinch.
Look for added value and other resources that can be offered and included too. Can one investor offer teams, tech, premises, distribution channels and introductions that the next competing investor can’t? Which can best help you get to the next milestone?
Negotiation Is A Learned Skill
Like public speaking, sales, pitch deck creation, and managing teams, negotiation is a learned skill. That means you can learn and improve on it too.
Fortunately, this does not require any more student loans or another four years in school. You don’t even have to pay for any super-expensive courses.
While the more you read and practice and engage in it the better you will get over time, even the tips below can give you a solid head start.
You can even hire people to help you negotiate. In this case that may include lawyers, investment bankers, and fundraising advisors.
Everything Is Negotiable
When you get into your fundraising campaign, start talking with investors, and receiving term sheets, you’ll hear “this is standard,” a lot.
There are some places where you are better off not rocking the boat. You are probably already disrupting enough with your startup. If you want to disrupt and change the whole fundraising game, then that may be a whole new startup venture to take on after this one.
This can be especially true in a very competitive fundraising environment when your investors are receiving 1,000 plus pitch decks from competing ventures every day.
Still, everything is negotiable. If there are things you must have or are deal breakers you can try to negotiate it. This is where an experienced advisor can really help make a difference.
Keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
You Won’t Get A Break If You Don’t Ask
Building on the above, you won’t get a better deal if you don’t ask for one.
If you approach it well, with common sense, “no” is about the worst thing that can happen. Just don’t be so difficult that it is so much easier and more profitable for a great investor to fund your competition instead.
This applies to so many areas of business. A little savings here and there can really add up to making a huge difference.
Negotiation Trends & Styles Change Over Time
Be sure that you are working with relevant negotiation advice. Just like management styles, what works in negotiation changes over time too.
Having your office lined with piranha tanks and medieval weaponry, or having tigers roaming around the office might have been cool and functional back in the day. It just might not get you anything but a lawsuit today.
The Style That Works Best Depends On Who You Are Negotiating With
Just as styles change, what works best will depend on the individuals you are negotiating across the table with as well.
Some people do seem to be more responsive to a tough approach. Yet, that can also instantly turn others off for good. Others are attracted better with honey than being herded by a stick.
Different people respond better to different mediums as well. Some will be completely unresponsive and ignore phone calls or Zoom attempts. Some are very responsive and faster and easier to work with via email or text message.
Equip Yourself With Knowledge In Advance
Just as with any battle or business dealings you should know yourself well, but know those on the other side of the table even better.
Just as boxers or football teams invest many hours watching the tapes and learning about their upcoming opponents, so entrepreneurs should be researching their investors. Not just the firms, but the individual partners and decision-makers standing in between them and the funding.
This is like knowing your customers intimately as well. Know their preferences, personal likes, triggers, and pressure points. What are they inspiring too, what keeps them up at night, and what are their challenges?
A lot of this you can find out on social media and other websites. You should also be talking to other entrepreneurs they’ve funded, and haven’t. Advisors who know them well can also provide a great hack to speed this up.
What’s Your Top Three?
Before entering any conversations or negotiations in any manner, you must know your priorities. What are your absolute musts and must nots in this deal?
Keep this to no more than three. One is even better.
What is the main objective here? Structure everything for that.
For example, you may absolutely want:
- To raise a minimum of $2M
- Not give up more than 49% of your ownership
- Close and put money in the bank within 30 days
In the video below I cover in detail how financing rounds work for startups which you may enjoy.
Start High, Know Your Boundaries
While starting low and extending your raise can result in oversubscribed rounds, starting high and coming down in negotiations is typically much easier. This is even truer when it comes to M&A deals.
Leave some room to negotiate. Yet, know your hard limits. Being willing to bend where you plan to, and refuse to caveat your line in the sand.
Understand That Everyone Wants To Win Something
It may seem fair to put your best bottom-line offer out there first, and then stick to it, take it or leave it. Yet, no matter how amazing that offer is, you have to understand that everyone wants to feel like they’ve won something in a negotiation.
Starting higher or with tougher terms gives you room to appear to give something up and concede something to them, and make them feel like winners.
Multiple Choice Options
Providing multiple choice options is also a great way to get what you want while making it feel like it is the investor’s choice and decision.
The wording and position you present these options in will help them to strategically be guided to the outcome you are looking for.
Two to three options are enough. Don’t overwhelm them, or you may just cause them to overthink, freeze and end up moving on to something else.
You may offer multiple-choice terms, or structures, such as debt financing, equity investment, or a convertible note.
Don’t Be Attached To The Outcome
No matter what, be okay with walking away.
If you can’t be, then there is no point in negotiating. You’ll have no power or leverage in the negotiation. You’ll have to take whatever is offered, no matter what the cost, how brutal and one-sided the terms are, and the imminent damage it will do to your company.
If it doesn’t fit what you need or is going to lead to a worse scenario, then you must be willing to walk away.
Have Other Options For Yourself
Even if raising from and bringing in this investor was ideal and by far the best option, you should have backup options. It will make being able to walk away and sticking to your priorities much easier.
Besides other equity investors, this may mean being ready for a merger or exit, being prepared to bootstrap and focus on sustaining yourself with revenue and profitability, partnerships, or taking on loans.
Your pitch deck, presentation, and everything leading up to it should position you for negotiating and attracting your ideal terms.
Often, experienced startup investors can see far bigger potential for your venture than you can. Feed them and fame the facts, let them realize the answers themselves. They might just connect the dots in a far more favorable way.
Listen A Lot
Listen at least twice as much as you speak. Investors will tell you what they are looking for, how to get their money and position your startup to get the best terms in the easiest way if you will just truly listen and absorb what they are saying.
Don’t stay quiet just to speak. Listen, think, and deliver.
Ask More Questions
If they aren’t speaking enough, then ask more questions. Ask open-ended questions so that you have more to listen to.
Make sure you have a list of these questions that you can ask in advance of any live talks, presentations, video calls, or in-person investors meetings.
Limited Time Offer
Put on the pressure and speed things up by making limited-time offers.
It may be a deadline for closing and participating in the round. Or deadline or limited slots for specific preferred terms.
You can always choose to extend this if you need to.
Negotiations & Deals Are Won Or Lost Before They Are Ever Started
As Sun Tzu would say, the battle is won or lost before you step onto the field. In these types of negotiations, it means doing your homework in advance. Strategically positioning everything, and delivering a precise pitch. As well as having established and nurtured the right relationships well in advance. Done right you will find commanding the terms and funds you desire from your ideal investors is far simpler.
Negotiations can be a big part of the fundraising process. These tips will help you nail it while making your negotiations go much smoother and easier while turning the power in your favor.
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