Steps to Growth Capital Self-Study GuideStep 8

8.6 How to Handle a Negotiation Session

Let's look into the future. Imagine you've received a term sheet, and you and the investor have just sat down to discuss it. Here's how you might handle that negotiation session.

Open the Discussion

Open the floor to discussion. Briefly state the differences you see between the investment proposal and the term sheet. Suggest to the investor that it would be beneficial for both of you to discuss the reasons behind your respective positions.

Focus on Interest

In specific terms explain the reasons that led you to propose the terms described in the investment proposal. Discuss your interests and listen to the investor's. Don't seek or give justification. Instead, look for common interests to give momentum to the negotiations. Both you and the investor will likely share several interests; one could be to ensure the success of your business.

Sometimes your interests on particular elements of the term sheet will be different from the investor's. When this happens, you need to look for ways to address the potential conflict and reach an agreement that satisfies you both. Once you know the other person's interests, it's easier to see several other solutions from which to choose. There is usually more than one position you can take to meet your respective needs.

Find Common Ways to Calculate Financial Elements

Some of your figuring could be different from the investor's partly because your approaches may not be based on the same factors. If there are differences between specific financial elements such as the interest rate or valuation multiples, you may only reach an agreement on these points by discussing them further. Present your approach and listen to the investor's. Discuss each approach and agree on a method that is fair, legitimate and practical to both of you. If necessary, suggest that the two of you seek expert advice to choose an agreed upon method. Once you agree on the financial elements, it becomes easier to look for creative alternatives to a financing deal.

Create Alternatives to Benefit Both Parties

Set aside a certain amount of time to explore possibilities that are valuable for both of you. Look for options that satisfy both of your previously mentioned interests. Don't criticize any of the proposed solutions until you have generated many ideas. Be creative and flexible. There is usually more than one right answer to the issues at hand.

In preparation for this meeting, you could brainstorm alternatives with colleagues, advisors and friends. It could help you start the flow of ideas when you meet with the investor.

Keep the Future in Mind

Remember that the deal you make on this round of financing will have an impact on the next round. When you're building a business, you may have to seek financing more than once as you grow. As a result, try to ensure that any agreements or contracts for the current investment don't overly reduce your flexibility in terms of future investment. In particular, consider whether the investor you're talking to today is willing and able to invest additional funds in the future.

Discuss Each Alternative

Evaluate the merit of each proposed solution on its own. Don't compare them to the others until you're down to very few options. Discount ideas you both think are unrealistic. Criticize constructively; focus on the ideas, not the person.

With one or a few options remaining, you should progress to finalize the agreement.

Multiple Negotiating Sessions

You'll probably hold several sessions before reaching a conclusion. Use the breaks to develop alternatives, analyse the other side's reasoning and needs, and assemble additional information to support your objectives.

Don't negotiate over the phone. This can be a dangerous way to proceed.

The 11th Hour

During negotiations most of the action occurs in the 11th hour. Use this knowledge to your advantage by keeping your concessions near the end of your scheduled meetings. Don't start off by giving in. Keep the discussion moving by switching to different elements or probing to gain more knowledge from the other side. Keep your own deadlines flexible by starting the search for financing early, ideally months before the actual cash is needed.

Select a Solution

Based on your understanding of the alternatives, select the solution most agreeable to you and the investor. Discuss the next steps with the investor to determine an immediate plan of action.

Close the Deal

When all issues are resolved, the terms are agreed upon in principle, the legal documentation is complete and the logistics of transferring the funds are decided, it's time to close the deal. Review the agreement in principle and the documentation, and sign the agreement.

Stay Calm

Control your emotions, perceptions and the way you express your ideas, needs and observations.

Be sure to take a look at our list of Negotiation Dos and Don'ts.

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