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Negotiations
"Be open minded and be willing to ask questions."*
The Term Sheet
Negotiations will begin seriously when you receive a "term sheet"
from the investor. This is his or her response to your proposal, covering
the main elements of the deal:
- how much the investor will invest;
- how much of that investment will be in the form of equity (shares) and how
much will be in the form of a loan;
- details about the shares and/or loan, such as type of share, when dividends
will be paid, or terms of loan repayment; and
- what features the investor wants to see in a new or revised shareholder
agreement.
What's on the Table
"I had a feeling for how much I was willing to give up. It's one thing
to ask about the future value of money and revenue projections and all that...
But at the end of the day, investors want to take a big enough piece
so that you feel the pinch, so you take their involvement seriously."*
| Price |
The value of the business and the amount the investor will pay, and the
share of the business they acquire are central to the negotiation.
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| Control |
Investors will be looking for ways to control their investment, such as
representation on the board of directors or some type of involvement in
decision-making. You as the entrepreneur have to decide how much control you
can give up.
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| Performance Measures |
You need to decide what measures and targets for success that both you and
the investors accept, and then you need to hammer these out (e.g. sales volumes,
cash flow levels, debt repayment).
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| Exit Strategy |
You'll need to determine how and when the investor will be able to take his
or her investment out of the business (e.g. sale of the company, initial public
offering, share buyback).
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| Employment Contracts |
Contracts to ensure that key players keep their positions may be part of the
financing agreement.
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A Negotiating Session
"Don't feel you have to handle it alone. Get your lawyer and advisors
involved."*
A good approach to a negotiation meeting is to proceed along these lines:
- Open the discussion — Briefly state the differences you see between
the investment proposal and the term sheet.
- Focus on interest and goals — Discuss your interests and listen to
the investor's.
- Find common ways to calculate financial elements — Some differences
may be due to different assumptions or approaches in financial calculations.
Try to get some clarity and consensus on these. Seek expert advice, if
necessary.
- Create alternatives to benefit both parties — Stay flexible and
look for alternatives. Reserve time to explore possibilities and be
creative about solutions.
- Keep the future in mind — Be sure any deal you make leaves you
with options for raising more funds in the future if required.
- Hold multiple negotiating sessions — Use the breaks between meetings
to develop alternatives, analyse the investor's position and get additional
information to support your goals.
- Don't negotiate over the phone.
"Don't get caught up in the speed of it all, in thinking
it all has to be done in a 25-minute conference call... I slowed down the deal
and made each part separate: the offer and the counter offer were separate
meetings, and I had consultations with my lawyer and advisors between each."
Use our Negotiations
Checklist to help you prepare to negotiate with investors.
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