4.1 Negotiation Fundamentals Some investors are so prestigious, or live in such a distressed region of the country, that they can simply dictate whatever deal terms they want and entrepreneurs must either take it or leave it. In most cases, however, investors and entrepreneurs will negotiate mutually acceptable deals. The negotiation process can build or destroy the investor’s relationship with the entrepreneur. Some Angels do not like to negotiate, but this is an important part of the investment process. We want our CEOs to be good when negotiating with customers, employees and suppliers, so why not with us? If we follow good negotiation fundamentals, we can coach our entrepreneurs and come to win-win agreements. Chapter 6 of Age of the Angels covers negotiations in some detail, and I also highly recommend the classic Getting to Yes (Fisher, et al.), which provides the basis of principled negotiations and is still one of the best short books on the subject. Some of the highlights from Age of the Angel and the NACO Academy Module 207: Negotiation include: Separate the people from the deal terms – Ensure that the give-and-take associated with deal negotiations does not affect the long-term relationship of the parties. Focus on interests, not positions – Understanding the reasons and interests behind the other person’s position provides vital information for inventing alternatives for additional win-win opportunities. Invent options for mutual gain – Increase the size of the pie before negotiating over your slice of it. There are three types of issues: integrative (one party cares more about this term than the other, so trading off these terms leads to win-win deals), distributive (both parties care equally), and mutual agreement (both parties want the same thing). Use objective criteria and fair procedures – Best practices here include: both parties should have only a single negotiator, third parties and lawyers should be kept out of the negotiations, don’t lobby for support among the other party’s partners, and don’t just “drop by” the company’s office. Dropping the anchor – Entrepreneurs are often expected to first propose the valuation and deal structure (i.e., drop the anchor). However, proposing a bad anchor will often make the other side simply walk away from the bargaining table – “Your valuation is too high, I’m not interested.” Setting the stage before dropping the anchor will give it greater legitimacy and result in fewer alterations. This is particularly true when the investor issues a term sheet. Deal terms affect risk, which affects valuation – Any deal term that reduces perceived risk (such as liquidity preference, anti-dilution and board seats) will increase valuation. Investors can often build these considerations into the negotiation; for example, “I’ll agree to your $3 million valuation if you agree to an anti-dilution clause.”
60 A Practical Guide to Angel Investing: How to Achieve Good Returns
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