Is Your Small Biz Attracting Investors’ Attention? How to Strike Fair Deals That Benefit Both Parties
Most businesses seek out funding to start their businesses, but if you’re attracting investors because you’re killing it sales-wise, you’re in a great position to negotiate your finance package. But even with all that bargaining power, you still run the risk of losing a lot of money or control.
How to Strike a Fair Late-Stage Investment Deal
If you’ve gotten as far as the negotiation process, you’re already among the lucky few. However, you’ll stop being fortunate if you hand over too much of your business to the wrong investor.
Never Give Investors 50% or More
Any investor who asks for 50% or more of your company is guaranteed to be predatory, regardless of the amount of capital they offer in return. Your investor could give you all the tools you need to expand, but what good are those tools if they own most of your business?
Remember that owning a large share means they become the final decision maker for a long time. You’re bound to disagree on something, and you don’t want your investors to threaten legal action or pull your funding if you decide to go through with a decision anyway.
Valuation vs. Investment Offer
Since you’re a stable business entity, you should be able to calculate the general value of your company. If your company makes $200,000 a year with minimal funding, marketing, and staff, the entire business could be worth $10 million or more after your investor helps you scale.
Let’s say the investor wants to take 15% of your profits with dilution after giving you a sum of $5 million. If you made 1 million in profits the following year, you would lose $150,000. Is that worth it? Yes, because under their guidance, you still made off with $850,000 within the first year.
However, if they’re only offering money and no guidance or guidance but no money, that will completely change how you’ll value your investment. Investments are rarely this cut and dry, and you often have to negotiate to make sure you’re getting the fairest deal possible.
You Hold All The Power
Employer review sites like jobsage.com show that the perception of power is what determines power, not the person’s position. Too often, small business owners feel that they have to accept a bad deal because they need the money, but if you’re already successful, you really don’t.
Even if you did need the money, there are several ways you can hold power in a negotiation:
- Understand what you want out of the negotiation, and you’ll feel confident.
- Prepare a bargaining chip. If you know what the investor wants out of the deal (scaling, international production, more products, etc.), you can use it to strike a deal.
- Structure the negotiation where you’re helping the investor, not the other way around. If you succeed, they get paid. Keep in mind that it’s your work that grows the business.
- Listen to your investors, build trust by fulfilling promises, and stay professional.
- Don’t settle and always negotiate on the deal they offer, even if it’s good. Most investors are willing to give up more of their slice if you’re intelligent on business matters.
While it’s important that you take power early, you can’t forget about the other party’s interests.
Negotiation Doesn’t End at the Initial Deal
Your investors will rarely take a back seat to your business operations, even if they’re only adding 1% to the pot. If you don’t succeed, they’ll lose money, so they’ll likely counsel you or steer you away from bad business deals or projects when they inevitably rear their heads.
When negotiating, you have to take the investor’s behavior into account. Do you like this person? Do you feel you both have shared goals and interests? Do they have experience in your industry? Will they benefit or do untold harm to your overall business goals?
Negotiations reveal a lot about a person and the way they approach business. If they’re overly aggressive or steamroll over you, they’ll likely always bring that attitude to the table.
Seek Legal Advice From an Experienced Attorney
Most business owners aren’t highly experienced negotiators, and that could mean investors will coerce you into settling on a deal that only benefits them. Once you make a deal, it’ll be hard to back out of it, so it always pays to seek out legal counsel during the negotiation process.
However, a business attorney won’t cut it. You’ll need a lawyer that’s actually worked with clients in your industry or participated in your line of work at some point. Otherwise, they won’t recognize a bad deal. Your lawyer needs to be there for you during the negotiation process.
As an extra positive, rolling up to a negotiation meeting with a lawyer by your side will establish a lot of clout. Your investors will know you’re prepared to handle your business’s growth.