Negotiating Your Terms

“Don’t give up control. And don’t borrow less than you need. That’s the number one problem is that people have the tendency to say “oh all I need is $50, 000 and I can take off with this”. And usually the $50,000 doesn’t even get you to the first step, it just gets you started on some things.” Dennis King ( CPA/Partner 38 years experience)

Negotiating can be a stressful time for you and your angel. It is when everything gets down to the nitty gritty. It tests the relationship under stress, so if you guys can get through negotiating you can get through anything!

 

Some key points to remember when negotiating are:

• Don’t give up control – no amount of money is worth giving up control over your business.
• Don’t sell yourself short. You have a great idea, make sure your numbers and data show that.
• Produce significant capital
• Stay Calm. Your investor uses negotiating as a test to see how you will handle pressure.
• Make sure you ask for enough money to follow your entire business idea through, from start to finish. A lot of businesses have what it takes to become successful but run out of money before success can happen.
• Be fair, everyone wants to feel like they are winning. Remember this is going to be a close business relationship, so be mindful of how it starts.
• Don’t take forever- no one wants to spend days negotiating terms, so go into the meeting with some self set decisions on what you can and can not except.
• Be flexible, it is important to show your investor that you are willing to work with him/her.
• Treat your investor like a customer- meaning don’t be afraid to show them your customer service skills.
• Have strong exit strategies

Remember that angel investors will likely focus on weeding out greedy entrepreneurs, likes structure, expects their entrepreneur to have legal representation, and they like to negotiate aggressively.

Keeping these basic principles in mind when negotiating with your angel, will help you to achieve the best results your business could ask for.

Amis, D., & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. London: FT Press

Good Structures, Good Business

The fourth fundamental in the book Winning Angels: The 7 Fundamentals of Early Stage Investing, is “Structuring”. Being that we are concentrating on organically growing your business, it is important to understand the different kind of investors there are so that you pick the right one for your start up.While this type of business growth usually takes more research, time, and sweat, it is still ideal when the entrepreneur is not working with much cash flow.

In this article I plan on shortly summarizing the two types of investors when dealing with business structure: the investor who feels structure is essential and the investor who feels structure is irrelevant. Depending on your needs and the industry you are in,  it will be vital to understand the difference so that you find the perfect angel.

There are three fundamental structures that are important to understand in order to really grasp which side of the structure line your angel investor is on. Investopedia defines the three fundamentals structures as:

Common Stock – A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders and other debt holders have been paid in full

Convertible Preferred Stock – Preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date.

Convertible Note – A debt security that contains an option where the note will be converted into a predefined amount of the issuer’s shares. A senior convertible note has priority over all other debt securities issued by the same organization

Now here are some basic points to remember and research when learning about your potential angel.

The Investor Who Feels Structure is Essential

• Controlling, coaching and previously burned angels
• Micromanages the entrepreneurial team
• Puts imprint on the deal structure and price
• Strong investment parameters
• Wants to be able to veto certain activities

The Investor Who Feels Structure is Irrelevant

• Enlightened, so-called virgin and winning angels
• They focus on trust
• Usually avoids hard negotiations
• They look for a “quality entrepreneur”
• Vested but less involved
• They know it’s a high-risk proposition and are willing to take the risk without added protection

As the entrepreneur it is your responsibility to do the research when it comes to the three fundamental structures in detail and to truly understand your investor’s business personality.

Another important fact to remember is that you must structure your business with investors in mind.This will be crucial when building the type of structure that will be beneficial to all parties involved. Taking the time to educate yourself on standard practices will save your business money in the long run. It is also good to speak with an experienced lawyer before signing any deals with your angel.

Amis, D., & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. London: FT Press

http://www.investopedia.com/terms/c/commonstock.asp#ixzz3e7WEz6Uz

Success is in the Evaluation

As I mentioned in my last post this is a perfect time for me to be reading Winning Angels: The 7 Fundamentals of Early Stage Investing which is giving Going 2 Natural the ability to gain insight to what attracts angel investors.

When trying to build your business on the basics, every piece of knowledge and insight really does help you save money and build a stronger business model. Research really plays a huge role in regards to helping attract the right kind of person to invest in your business.

As we venture into the second fundamental that attracts angel investors, one must be able to break down the core areas of their start-up to ensure their business passes the evaluating stage. Although evaluating happens constantly from an investors standpoint throughout the process of a business venture, it is important to know that this step in the process is considered very important and can be a game changer for your angel.

What is evaluating? To keep it simple, it’s a critical thought process that “sizes up the fundamental elements of an opportunity.” If an Entrepreneur knows what an investor is looking for, it will be easier to accomplish the four essential elements that are generally wanted when investing in a new business.

This method is called the Harvard Framework and it consists of people (your team), the business opportunity (your business model, plan, customers, etc), context (technology, your competition, supply and demand) and the deal  (the pricing and structure.)

G2N is going through this exact process currently so it will be a great opportunity for me to be able to break down a quick overview on how we plan on using the basics and the resources we already have to start this process. Now please keep in mind that this is just an overview and each section should be researched thoroughly to optimize your results in creating four strong elements of your own personal business framework.

People

Everyone has been made for some particular work, and the desire for that work has been put in every heart – Rumi.

The first and most important thing when building a strong and loyal team, is you! Remember to be honest, loyal, driven, and focused. When an Entrepreneur has these qualities and demonstrates them on a daily basis,  there is no stopping them. Remember your team is only as good as you as you are. So self growth (personal and professionally speaking), is important. You must truly believe you are capable of the job, if you expect anyone else to believe the same.

The next key is making sure the people on your team have a passion for what they do. If there is no passion, there will be no drive. This goes back to sourcing. Reaching out to different professionals in a variety of capacities can only help to enhance your search for like minded people who have the same vision and goal as you. The management team is key to the success of your business, so choose wisely and conduct research, ask questions, and I always suggest a trial period to make sure they mesh well with your existing team.

Business Opportunity

No serious investor will ever take a chance on a new business without a solid plan. Creating a strong business model is not an easy task and can even seem daunting to an experienced entrepreneur. Google is a perfect way to get started if you have never created a business model or plan. You can even look up different models depending on the field you are in, using your favorite model as a template to create your own masterpiece. I suggest again that you research each section of a few business models in your industry in order to create a strong plan that really makes sense and shows profit growth.

Context

It is very important to show your angel that your service or product is trending in the economy. Is it needed or wanted? Once again, research is the key to analyzing the actual demand of what your business is offering. If there is no demand, then it is time to rethink your vision.

Furthermore, it is important that you have the technology in order to grow and also make sure all the regulations are in order to run your business efficiently and successfully. Last but not least, how do you plan on being competitive in your market? This question must be answered with a skillfully designed plan in order to shine above the rest and peak a real interest from your angel investor.

The Deal

Of course, “the deal”  is a very important part to to the financial aspects of your business. This will determine how much of your business you are willing to let go. This can be tricky as you want to make sure to offer enough to attract a sizable return for your investor, but you also want to be sure you still maintain the essence and spirit of your vision and business. I suggest if you do not have a strong financial background, now is the time to use your resources to recruit some help. There are many resources when doing this. For instance, universities will sometimes have programs where you are able to contract a student on  a stipend or as an intern for a semester for a small fee and/or class credits. It is a win-win situation for both sides. This is just one way you can find financial advice for little to no cost.

So as you see this is definitely a very time consuming process but if done correctly, it will contribute greatly to getting the attention and confidence needed to attract the perfect angel for your start-up business.

*Note: In order to be able to qualify to work with students, the business must be established with the Federal Government (EIN number, etc.)

Amis, D., & Stevenson, H. (2001). Winning Angels: The 7 Fundamentals of Early Stage Investing. London: FT Press