If you’ve been in the startup world for any amount of time, you may have heard a story or two about angel investors. Angel investors are individuals who grant startups and small businesses the capital to get them off the ground and running. Startups often seek help from angel investors to get their operations running, hire a team of people, and have enough cash to start bringing in revenue. In some cases, certain startups may have seed funding from early stages—whether it be from their own pockets or other venture capitalists and investors—but this is not always the case for every startup.
However, this is not all bad news for those who may not have the capital for seed-funding. Turning to angel investors can be a great idea, depending on the approach that the business takes. In fact, angel investors are often very accredited and can be recognized by the Security Exchange Commission (SEC), meaning they are able to become involved in investments that may be unavailable to others. To achieve this status, they must first prove their worthiness through their wealth, management of that wealth, and expertise in various aspects.
While approaching an angel investor may seem within reach, there are a few things to consider before doing so. Not only is there a vetting process to be conducted on both ends, but it’s important to examine the current and potential future relationships you can hold with an angel investor. Of course, the age old question of whether or not to negotiate with angel investors is also of utmost importance.
Whether or not you should negotiate with an angel investor may not always be up to you. Some angel investors will let you know off the bat that they are not open to negotiating, while others may choose to be open to negotiation.
Investors who refuse to negotiate may do so for a number of reasons, including but not limited to:
- They may not have the time or bandwidth to hear your proposal and get into the nitty gritty details of a deal.
- They prioritize personal relationships when looking to build trust and would rather get to know the startup on a deeper level before giving them money.
- They may not value the company enough to consider investing in it.
Regardless of the reason, if an angel investor does not want to negotiate, it may be best to read the room before trying to test the waters. Be careful—If it goes the wrong way, it can cost your company the deal.
If you meet an angel investor who is open to negotiations, there are a few things you can consider putting on the table:
- First, it’s important to talk equity (aka how much of your startup the angel investor will own). Typically, angel investors will take somewhere between 20%-50% of the company’s equity for investment, but this percentage is up for debate. To determine the appropriate amount, it’s important that you value your company correctly so that you can set a realistic amount as a baseline and go from there. This will also help you ensure the offer that the angel investor is proposing is within the appropriate range for the overall financial value of your business.
- Second, you’ll need to outline the terms of involvement. The last thing you want is for an investor to be more or less involved than you expected them to be. Make sure you have a clear understanding of whether or not they will be a part of your startup’s board, how much decision power they’ll hold, whether or not they’ll lead the charge for future funding rounds, and what kind of changes they may implement once on board. It’s important to come to a mutual agreement with the investor to something that works for and benefits both parties, especially when it comes to potential changes that may be made.
- Third, negotiate the investor’s exit strategy. Much like an employee at a startup who may want to be paid out at the end of their time at the company, angel investors will want to negotiate an exit strategy that benefits them financially. This is an important aspect of the negotiations as it is very forward-looking. Additionally, the terms that the investor proposes can be indicative of how passionate the angel investor is in your business.
For example, if an angel investor wants to stick around until your startup is able to potentially IPO, it shows that they are in it for the long-haul and are probably very interested in your company. Keep in mind, however, that if an angel investor helps your company IPO, it may be appropriate to offer more favorable terms in the exit strategy.
- Fourth, discuss what changes will be implemented once the angel investor is on board. As we discussed in a previous point, an angel investor may want to help your business, but it may include making leadership, operational, functional, and messaging-related changes. Before going into the deal room, ask yourself what changes you’d be comfortable with someone else making for your business, and what non-negotiables you want to keep the same.
- Last but not least, who can they connect you to? While there is a lot to consider in the thick of negotiations, it’s still crucial to remember that angel investors have connections that could have an impact on your overall relationship. An angel investor’s connections can provide future value to your company apart from his/her initial financial contribution. See who they know and who they’d be comfortable introducing you to.
Negotiations are typically not a fan favorite, and most business leaders would prefer to avoid them. Despite the temptation to skip over the negotiation process out of discomfort, it’s important to not cave in. It’s better to clearly communicate and be upfront now than to face confusion, miscommunication, and conflict later on after a deal has been signed. More than that, negotiations should bring a fair deal for both parties that are geared towards the success of your startup.