What is a pre-emptive offer?
I always encourage start-up founders to prepare for the next stage of fundraising as quickly as possible. The pitching process can be complicated and can take time, so it’s great to be ready as quickly as you can. In some cases, entrepreneurs will be given an offer of funds before they are ready for their next fundraising round.
This is called a pre-emptive offer. It’s a great sign that you, as an entrepreneur, are doing everything right, but it can also take people by surprise and result in less than desirable investment terms.
In this article, I’m going to explore what a pre-emptive offer is and how you should prepare one.
Pre-Emptive Offers Before Fundraising
A pre-emptive offer is any offer of investment before you actively enter into pitching to investors. However, it’s a little more complex than that. There are two types of pre-emptive offer which you will encounter as an entrepreneur. These are:
- Up-Front: I’ve labeled the first type of pre-emptive offer “upfront”. Here, the investor tells you that the offer exists and how much they are offering for a piece of your business.
- Undefined: The second category I’ve labeled as “undefined”. The reason for this is that in this situation an investor states that there is an offer of investment, but without defining the terms.
When you are thinking about pitching investors and fundraising remember that storytelling plays a key role in fundraising and you will need capital to scale things up. This is being able to capture the essence of the business in 15 to 20 slides. For a winning deck, 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.
The Process of an Up-Front Pre-Emptive Offer
The best thing about an upfront pre-emptive offer is that the founder is not required to create a full pitch deck for the investor. This is often the best-case scenario, where the investor sees the inherent value in a business and wants to conclude a deal as quickly as possible.
In essence, this means you don’t have to go through the usual process required to persuade an investor to invest.
They know what they want, and they are offering an amount upfront for it. The founder has a good bargaining position here because they know that the investor is trying to invest before others get the opportunity.
You can use this to your advantage when negotiating equity and investment amounts. However, just because an investor is making a pre-emptive offer, this doesn’t mean that they are effectively saying that there is an open checkbook. Their offer in this situation is usually, at the very least, in the ballpark of what you can expect from them.
What to Expect from an Undefined Pre-Emptive Offer
Unfortunately, not every pre-emptive offer is made upfront. Instead, investors often sound out founders to see if they would be open to a pre-emptive offer. This is an undefined offer, where no valuation is put forward.
In this scenario, the founder is still expected to build a pitch deck and to pitch their ideas to the investor making the offer. It’s more like an invitation to a one-on-one pitching process. Your chances of securing the investment are still far higher in this situation than normal, but they are not a certainty.
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