This article from Oxford Foundry Start-up School will help you get it right the first time!
What are some key things to consider when negotiating terms with investors?
- Be flexible: This is especially important in relation to your valuation. Investors will have strong ideas about how much they are willing to and they know they can generally find another similar business, so they will walk away if you cannot be prepared to review and adjust.
- Be efficient: Ensure you attend calls/meetings on time. Ensure you can respond rapidly and effectively to the Investors’ information requests. Ensure you have all the evidence and information that backs up your pitch: company information; legal information; financial spreadsheets ; market research; detailed information on the technologies you are using/developing etc. Ideally set it all up in an online folder so that it can be easily accessed.
- Be aware of the sticking points: Identify where the investors may have doubts about your business or capacity to achieve key developments/milestones in the time stated etc. Prepare further relevant evidence or data or testimonials etc to support your claims and provide reassurance .
- Be honest and transparent: do not make claims that you cannot substantiate. Investors will see through these and will not feel that they can trust you with their money. Admit is there have been issues in growing your business or where there are challenges or gaps and explain how you plan to address these – and how their investment and support can help.
What are some classic pitfalls to avoid?
- Make sure you ask for the investment you need – Don’t ask for too little or assume you should ask less to be “nice” to investors. Always be clear and accurate on what investment you need. Otherwise you may reduce confidence in you capacity to achieve your development and growth plan or even lacking ambition.
- Don’t ask for more than you need – Investors will look for you to justify your investment needs you will have to meet significant performance expectations to not disappoint your investors from providing further investment – and this can put huge pressure on you and your team
- Don’t undersell yourself – Make sure you clearly state all that you have achieved in developing your business to date – this will show your commitment and capacity to execute on the plan. Don’t oversell yourself either by making claims about what you have achieved or will achieve that you cannot substantiate.
- Don’t claim that your product /service/technology is unique and that you have no competitors – There will always be competition or something comparable and you need to show that you understand it and can build a competitive defensible position.
- Don’t accept money from the wrong investors – Ensure you do your due diligence on your investors, check out who they have invested in already; speak with entrepreneurs they have invested in to understand what added value they bring; if its a syndicate, check who will be the lead investor in your business- and would you be prepared to take advice from them? – remember it’s like a marriage – it could be a long term relationship!