There are 2 sides to investing. The potential investor and the person seeking investment.
Many people focus on funding their businesses with loans. This is true whether they are starting a business, expanding their business or need cash to wait out a downturn in the economy. They dismiss investors as a means of finance, because they do not understand that many different deals can be structured to make an enticing offer to a potential investor.
An understanding of business entities is an essential to create any investor proposal, because corporations and LLC’s provide the vehicle and the alternative methods for investment funding.
If you have a good business idea or a sound business that needs funding and you cannot get a loan, you must consider the investor option.
A knowledgeable lawyer will be able to give you different suggestions on how to structure and investment proposal and how to sweeten the investment opportunity with counter offers.
The following information provides a basic approach to negotiating.
The Negotiating Attitude
Negotiations, by definition, means “bargaining.”
Bargaining is from the Latin barca, a bark. If you think of negotiations as dogs growling and barking at each other, you may be tempted to bare your teeth. If you insist on taking a dog’s attitude to the proceedings, it is preferable to start by smelling each other. That way you are more likely to smell your way to a successful solution.
Go into the negotiations with an open mind.
Win-win results are only achieved if you negotiate with a genuine intent to find win-win results.
Never negotiate with a take it or leave it attitude. There will be plenty of time for that later. “When you do tell someone to go to hell, do so diplomatically so that they look forward to the journey.”* You never know whom they know, which could become a thorn in your side later, whether they know someone who may be interested in your proposition or whether you will ever meet or need them again.
(* Bumper sticker)
Step- by -Step Investor Negotiations Strategy
- Prepare your start up Business Plan.
- Have a complete Business Plan prepared and ready to hand to an interested investor.
- Make a list of possible investors. There is the “6 degrees of Separation Theory” that posits that any person on this earth can get connected with anyone else on earth through 5 intermediary contacts.
- Decide whether you want one investor or more.
Advantages of one investor:
- One investor has a bigger stake in the business, so he/she will be more interested in the business.
- If your investor has good business experience, this can be an extremely valuable resource that you can tap into.
- It is easier to convince one person to invest than convincing many people.
Disadvantages of one investor
- One investor may insist on management rights and veto power on your decisions.
- Many investors are less likely to hound you at every turn. They are primarily interested in making a profit from their investment and for the most part will leave you to run the business without interference.
- With multiple investors you may be able to raise all the money you need by treating the investments purely as share capital (sale of shares) and not designate part of the investments as loans. This way the corporation does not need to repay loans and more importantly, you will not be required to sign a personal guarantee on the loans.
{Negotiation strategy: If your one investor is interested in your idea, but is reluctant or unable to loan/invest the full amount, suggest that the investor approach his/her friends who may be interested in participating in the deal}
How to negotiate.
It is best to lead a person to their comfort zone where they propose that which you wanted all along.
Make your proposal.
From this point on, listen more than you speak.
When you do speak, show that you have been listening to their concerns/objections:
“As I understand your concern, ….. ( mention the issue)…….is creating a problem/bothering/making it difficult for you. What can I do that will solve this issue for you?”
If the person cannot see the solution that you were thinking about, then make your counter-offer, but propose it as a solution to their problem.
“I understand that this is an issue for you, because you mentioned (blah, blah, blah), but perhaps if we did (blah, blah blah) in our arrangement, it would make you feel better about the situation.”
If you still do not get a positive answer, sweeten the deal. At all times, you are finding solutions to the other party’s concerns. Be nice. (You cannot catch bees with vinegar. You must use honey.)
Because you have been carefully listening to the other party’s comments, you will detect whether:
- you are getting a kind rejection to your proposal and no amount of honey will be able to sweeten the deal, or
- the other party does have an genuine interest in your proposal, but has concerns, or
- the other party will do a deal, but is milking the deal for every drop that can be extracted.
In situation A.
Ask whether they may know someone who may be interested in your proposal and say goodbye nicely. Thank them for taking the time to listen to your proposal.
In situations B and C.
The most important issue here is to determine whether you are dealing with situation A or situation B?
It is sometimes difficult to differentiate between a person who is interested, but who has genuine concerns from a person, who will do a deal, but is pushing for every last drop.
In the B situation, find a solution.
Do not get agitated with the C situation. It is just business and it is not personal. You can walk away from it at any time. You must know when to hold your cards and when to fold them.