Steps to Growth Capital Self-Study GuideStep 8

8.2 Be Prepared to Negotiate

Be Prepared

You've worked hard to attract interest in your proposal. Now you've got to be ready to negotiate. Here's an overview of the process and some things to consider before the negotiations begin.

What will investors do if they're interested?

Investors who are interested in what you have to propose may respond with a counter offer. Investors will often set out the conditions of investing in a term sheet. Very simply, the term sheet is a brief document that outlines the investors' preferred terms for the deal. It sets out how much they will invest, how much of the equity of the firm they want, and other conditions and understandings required to satisfy them. (There is more detail about term sheets later in this Step.)

What if I don't like the terms they are offering?

When you receive a term sheet, the negotiation process has begun. The first task will be reviewing the term sheet with your advisors and management team. The investor's offer and your proposal may be similar or quite different, but they will rarely be exactly the same. So it will require a process of accommodation, communication and strategy to yield a result you can both live with — the basis for a deal. Assuming you and the investor are reasonable people, and that each of you wants a deal, negotiation is how you will arrive at an investment scenario that works for both of you.

How long will the negotiations take?

The amount of time it takes to negotiate a financing arrangement will vary with the complexity of the arrangement, the motivation of the participants and many other factors. You'll probably hold several sessions over a few days or weeks before reaching a conclusion. You'll likely want to consult with advisors or your management team between meetings.

Who will negotiate the deal? Do I need an advisor?

Don't jump to the conclusion that you must negotiate the deal on your firm's behalf. Investors often use advisors during negotiations. And you should seriously consider retaining your own advisor too, ideally someone with negotiating experience. Advisors may play different roles: providing expertise on issues such as taxation, business valuation, shareholder agreements and other legal issues. In general, advisors can provide some much-needed perspective. By helping you maintain your objectivity and remove some of the emotional reactions that can result in a battle of wills, advisors can facilitate the process of getting to a deal.

What's my lawyer's role?

You'll need a lawyer for at least two reasons: to ensure the transaction complies with any applicable federal and provincial securities laws, and to develop appropriate legal documentation, such as a shareholder agreement or a lending agreement. These documents are important to the financing arrangements and may affect your company for years to come.

How can I prepare a negotiating strategy?

Take the investor's point of view: It's helpful to have some advance idea of where you and the investor may see things differently. Think about the following aspects of your proposal; how might an investor differ with your position?

• control of the key functions of the business;
  
• amount of capital invested;
  
• amount and frequency of information provided (monitoring); and
  
• investor's opportunities to review (and perhaps approve) your strategic plans and capital expenditures.

Learn as much as you can about the investor. Check on the investor's background and past performance. Try to take the investor's perspective to anticipate what that person will want. Research the Investor.

How can we keep the process moving forward if we seem to be far apart?

Develop objective criteria: To get agreement on issues where you and the investor differ, develop objective criteria to measure the impact of each of your terms. Let's look at the investor's representation on your board of directors as an example. Objectively speaking, the investor may have a need for monitoring the company's progress (through a high level of board representation) while you have a need to keep control (and the board is an important element of your overall control). What criteria could you use to work toward an agreement? Perhaps you could advance the concept that the investor's level of board representation should parallel the amount of the company the investor will own. By owning 40% equity, the investor could have 40% representation on the board.

How can I make sure I don't give up what's important to me?

Know your bottom line: Identify which items you consider essential (your must-haves) and which ones you're willing to give up (your trade-offs). Now establish your opening position and also your bottom line on all major issues. Be sure to consider factors other than just money, such as control of the business over time, the value added by the investor's expertise, expanding the board of directors to include other outside directors, etc. Check with your advisors to make sure that your positions are reasonable.

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