What are the greatest benefits of working with angel investors?
- Equity financing means you don't need to take on debt (like with business loans).
- Angel investments are more flexible than venture capitalists or institutional investment funds.
- Many angel investors have networks of experts and mentors that help you avoid the mistakes that make other startups fail.
1. Prep: How to be 100% ready for your negotiation
Do your research: Make sure you have a solid business plan and an appropriate valuation
Investors expect you to be rock-solid in all the foundational knowledge about your business.
- a validated concept,
- a clear target market,
- detailed knowledge about your customer base,
- a go-to-market strategy,
- a financial plan, a competitive analysis
- and an amazingly wicked problem that you solve with your genius product or service!
Based on all that, you should calculate your pre-money valuation (the near-future value of your startup) and be ready to defend it rigorously.
Your success hinges on this ability.
Select the best: you can only have a great negotiation with a great investor, so go for nothing less
Don't go for just any angel investment.
Find angel investors whose values and motivations align with yours, who have a track record and a fitting but not directly competitive portfolio.
Ideally, they should understand your industry, be able to grasp how your product or service works and connect you to other industry experts, maybe even clients.
Go for smart angel money if you can find it.
In short: Not all potential angel investors are equal.
Find the best.
2. Shine: Start strong and set the right tone to ensure success
Don't just pitch. Stun them.
Inexperienced founders think that a pitch needs to "tick all the boxes," which it does.
But most importantly, your pitch to angel investors needs to #S-T-A-N-D# #O-U-T# from the crowd.
So showcase your bombastic, amazing, unique superpowers first, and then go tick the boxes.
Showcase scalability and profitability
Move on quickly to clarifying how your startup will scale and how it will become profitable.
Make sure you've done your research and that your numbers are well-founded and believable.
Yes, financial plans are projections, but they should be based on realistic expectations, not fantasy land fluff.
Highlight your competitive advantage
Next, show your investors how you will out-compete anyone trying to do anything even vaguely similar or, god forbid, steal your idea!
Protected intellectual property or patents can work towards that. Or specialized tech knowledge or a strong network of trusted partners that only you have access to.
Pull out all the stops and leave the investors in no doubt about your "unfair" competitive advantages. 🙂
3. Manage expectations
Be clear on developments your investors can expect in the next few months and ones they shouldn't
Lay out a clear path about how you'll further develop your MVP, test product-market fit, engage your first customers, grow, scale, employ new team members, make your tech or service more robust, and so on.
But also clarify what investors should not yet expect.
My motto: under-promise and over-deliver.
Dazzle with your exit strategy
Amaze your angel investor with your understanding of exit strategies and your ability to plan far ahead (five to seven years).
Set strategic goals for making a strong exit by an initial public offering or selling to a large multinational corporation.
Not every startup story (and not all angel investing) needs to involve an exit.
But if yours doesn't, some angel investors will be a no-go, and those who do accept your decision will want a good explanation why.
Plus, it might affect the angel investor's equity stake expectations.
4. Align: Focus on what makes your angel investor want to cooperate
Align values and interests
People don't just have logical goals and quantifiable objectives; what really moves them are their underlying values and interests.
Similarly, most angel investors are not purely KPI-driven, especially not in the impact space.
So, find out how your values align and use that in your negotiation.
Build trust and stay transparent
Listen well, find out what you can about your investors' convictions, and get personal (to a degree).
Have a drink or lunch. Build trust by showing who you are beyond the facts and figures and founders' ambitions.
And build trust by being transparent.
Whatever you think might disadvantage you, and you'd like to hide it - don't. Come as you are. That's the greatest strength of relationship-building.
Take their concerns seriously
When they worry about some hurdle you may face or an area where they feel your team lacks key competencies, take their concerns seriously.
Don't argue about why "you've got that covered" or "their concern is irrational" - it doesn't matter whether it is or isn't. It's theirs.
And if it's going to keep them from investing, you better take it seriously.
So allow criticism and deal with it constructively.
Co-design win-win scenarios
Gaining a deep understanding of your angel investor allows you to align interests and generate more beneficial terms for both parties.
The best negotiations are more than just "How can I get them to accept this condition?"-competitions.
They are co-design processes for mutual benefit.
5. Bargain: Skillfully handle competitive aspects of the negotiation
How much equity should you offer your investor?
Equity percentages are influenced by the following factors:
On the monetary side ...
- How much initial investment you need now,
- how much time that money will buy you (until you need more),
- how much your angel investor's stake will be diluted in the next round,
- whether there are co-investors or angel groups involved,
- whether this one is the first,
- and how big their ticket is.
Typically, a larger investment means more equity.
On the non-monetary side ...
What startup stage you're at, what you've achieved so far, and at what time in your journey the investment will be made.
Also, what non-monetary goodies the investor brings to support your business venture:
Experience, a network, insider industry knowledge, mentorship, clients? And how does that affect the equity stake they expect?
How to out-leverage high equity demands
Don't make the mistake of limiting the negotiation to equity and investment size.
Accredited investors can earn from dividends, and many look at the exit as a main earnings goal. Use that.
For example, a strong belief in successful exits can get a potential investor to accept a smaller ownership stake.
Also, some of the more risk-averse angel investors may be quite happy to earn a salary (an annual income) for the help they provide as mentors or advisors.
If they're open to that, and if your cash flow allows it, that can be a way for you to hold on to more equity.
It's always about weighing the pros and cons for both sides.
The key skill of negotiating a great valuation
One of the main factors that influences the amount of equity you give away is your company's valuation.
Here's an example:
You say your valuation is $5 million,
and the investment you’re looking for is $250.000.
That gives them 5% equity.
But if they push your valuation down to $4 million,
the same $250.000 gives them
6.25% percent equity.
And that’s not all:
If you started with a 5 million valuation in pre-seed, that affects your valuation in the following investment rounds (seed, series A, etc.).
Very few startups do that well. Be the exception.
Other deal terms:
Will the investor have a board seat? What voting rights will they hold?
Angel investors typically invest their own money, so they may want some control over its fate.
Who will lead future funding?
Some early investors want to lead future funding rounds.
What conditions does their commitment come with?
What non-financial benefits do they bring?
Getting your angel investor to freely share all their experience, network, clients, etc. (but without demanding any extra equity) is another important bargaining skill you'll need to develop to get the best deals out there.
Manage power dynamics, confidently
One of the abilities all great negotiators have is to show unshakable confidence in meetings with very powerful people - and you can learn this, too!
The first thing to know is: All power is perceived.
The money angel investors have is not power over you.
And while their decision whether to bless you with initial investments may feel like they have power over you, you also have power:
The power to allow the investor to do something worthwhile with their money.
They're looking for that opportunity, and you can give it or take it away.
So, power dynamics really just depend on how you decide to perceive them.
Remember that when you're negotiating their equity stake.
Angel investors typically seek confident founders.
So show them that confidence.
6. Close the deal
Before giving you money, angel investors want to understand the potential and the risks in more detail.
They may hire an accountant or consultant to help them check your business plan, your financials, etc.
The better prepared you are for this due diligence, and the sooner you can answer all their questions, the more likely it is that you'll close the deal.
Usually, the investor's lawyers will draw up a contract.
Sometimes, details need to be adjusted during due diligence.
Be ready for this and bargain if necessary.
Make sure you understand these contracts completely.
Hire a lawyer for support.
There's too much at stake to make mistakes at this point.
Sign and celebrate!
This is a big step for you and for the investor, so have a celebration (or at least a gesture or ritual) planned for the day you sign.
Or for the weekend after signing.
Show your investor your appreciation for taking this big step with you and for joining you on your journey!