Avoid common mistakes with these 6 negotiating tips
Negotiation Between Healthcare Professionals and Venture Capitalists, a new white paper from virtual data room Merrill Datasite, outlines some of the common mistakes entrepreneurs make in negotiating deals, and offers guidance on how to prepare for negotiations. It starts with the fundamental idea that both parties should come to the table open to new options for making something together that they could not do separately.
Be transparent. At least some depth of the details of the project, from technical elements to patents, should be made available to the investor so he can assess the risk at hand. Avoid temptation to inflate revenues and profits to get a better valuation, keeping in mind that it's also important to generate trust with investors. An investor will be with the company through its growing pains and victories, so a good personal relationship is also important.
Keep your ego in check. Remember that business plans and financial projections are completely based on estimates and experience. Investors will do their own due diligence and consult their own network and knowledge. Remember that for investors, the greater the risk, the greater the expected return. Also keep in mind that risk is hard to quantify, so there will be plenty of back-and-forth on terms of the deal.
But, remember that you have the power to influence the negotiation. Although it's the startup that gives the pitch, remember that you shouldn't just be playing defense. Entrepreneurs also choose investors, and if the opportunity is truly good, there will be alternative investors and sources of funding that should be considered. The VC needs good companies to build his portfolio, just like the entrepreneur needs funds to grow his company.
Remember that investors want an exit. While entrepreneurs tend to be in love with their idea or project, investors go into a company already thinking about how and when they will be able to get out of it. Be prepared to answer who would be interested in buying the company.
Understand that the commitment of the team is important. VCs are investing in the execution of an idea, not the idea itself, so they will want to know who's doing the work. The founder's level of involvement is a good starting point for assessing how much he believes in the idea. Founders that don't have skin in the game, so to speak, may have their commitment to the company questioned.
Be prepared to talk about what the money will be used for. While it may seem obvious what investor money should and shouldn't be used for, define up front what appropriate and inappropriate use of the funds would be.
[Photo by - khrawlings]