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.
Founders should still treat this is a serious pitching scenario, because the target investor still needs persuaded to sign on the dotted line. The negotiation stage will take place as normal, but with the founder knowing that they at least have the investor’s attention.
Interest Vs an Offer
It’s very easy to be enthusiastically carried away when a successful investor shows interest in your business. However, a common mistake is to believe that interest in a business is the same thing as an illegitimate offer. It is not. This is even truer for pre-emptive offers.
How, then, do you know the difference between mere interest in your business and a real offer?
The answer is simple: You need documentation. This is not an email where an investor seems enthusiastic about your business idea. It should be a legitimate Term Sheet, with a bullet point list of the offer being made.
In some situations, potential investors will dance around making a legitimate offer so that they can get more information about a business. This is a trap new entrepreneurs should be wary of – don’t reveal the specifics of your patents and other sensitive data until you have a term sheet offer.
Preparing for a Pre-Emptive Offer
Preparing for a pre-emptive offer is a little more difficult than preparing for a standard funding round. The reason for this is that you don’t know when that pre-emptive offer is going to be made. When it comes to funding rounds, you are setting the schedule for your business. This means that it’s easier to prepare for a full funding round than it is for a pre-emptive offer.
To lay the groundwork for a pre-emptive offer, founders should ensure that their main talking points, marketing plan template, and research is always at hand. Unlike a pitch where you can display this information via a well-designed pitch deck, you should have these talking points well-rehearsed for conversations.
The reason for this is that most pre-emptive offers do not magically appear out of nowhere. In fact, investors will normally have informal meetings with entrepreneurs before tabling a pre-emptive offer. It’s very rare that there is no indication that a pre-emptive offer is about to be made.
These conversations may feel informal, but founders should remember that they are still being evaluated during them. That means being able to put across:
- What your business is
- What problem it solves for customers,
- The potential market size
- What sort of return on investment the business will produce
- What business model you are using
Pre-emptive offers are based on these conversations, so take them seriously. It’s the best way to prepare for and to encourage such offers. With this in mind, it’s a great idea to meet with potential investors before your main fundraising rounds if possible.
It used to be that entrepreneurs were encouraged to only have such meetings during active fundraising, but investment moves so fast now that entrepreneurs should never turn down the opportunity to chat with an investor, even informally.
Should You Take the Pre-Emptive Offer?
Take the following into consideration when deciding whether to accept a pre-emptive offer are not:
- If there is no term sheet, then remember – it’s not a solid offer yet! So don’t accept until one has been presented.
- Are you happy with the investor owning a share of your business? Would you want them to increase that ownership later in future funding rounds? Not every investment is a good one. Treat your business as your pride and joy. Only put it in trusted hands.
- Are you happy with the amount of equity they are asking for, and at the price?
- Do you think you will gain access to better investors if you wait until you are pitching? If so, then it’s worth considering holding off on giving away a part of your business too soon, as having existing investors could deter a more important subsequent one.
- Is the amount of capital being offered enough for you to reach your goals? If you are in dire need of a cash injection, then you should probably take the pre-emptive offer, but if you need a larger investor, then you should search for that instead.
How do I Negotiate a Business Deal?
If you want to learn how to negotiate the perfect deal for your business, check out the Inner Circle, where I offer advice and mentoring to thousands of entrepreneurs, teaching them how to get the best deal for their business.
Also if you would like to learn how to create a pitch deck you may find interesting the video below where I cover how to do so in detail.