4 Tips on Negotiating an Investment Deal

New businesses on the market and startups that haven’t been launched yet oftentimes consider seeking outside investment to help them develop and grow. Angel investors and venture capitalists are always looking for businesses with the good idea and a great potential to endorse. If your business fits that criteria, you can easily ensure business success by securing the support from such investors. However, getting investors on board is a lot more difficult than it seems.

You’ll have to prepare to negotiate terms and convince investors that your business is a safe investment with the potential to become a lucrative enterprise. Investors won’t easily provide their support unless they’re absolutely sure that your business will succeed on the market with their help. It’s up to you to prove your confidence and persuade investors to help you out. Here are a few tips on negotiating an investment deal.

Choose the right type of investor

When seeking outside investment for your business, you can either turn to angel investors or venture capitalists (VC). People oftentimes consider the two to be one and the same, but that’s not how it is. Angel investors are willing to support business owners who are passionate about their business idea. Businesses that are looking to provide public service aside from gaining profits are more likely to secure aid from angel investors than those that only seek to get rich fast. That being said, angel investors usually ask for 25% of return on investment when providing you with financial assistance.

On the other hand, VCs often support business with the potential to become successful and profitable enterprises in anywhere between three to five years. The get-rich-fast attitude bodes well with VCs. However, in return for their support, VCs ask for a percentage of your company, making them official stakeholders of your company and also involving them in decision making. Knowing the difference between these two types of investors will help you decide whose support to opt for and which investment is better for you and your business.

Be honest

One thing you must understand is that investors get investment proposals from dozens of business owners each day. That means that they can evaluate both you and your business idea almost immediately. However, if your idea is interesting enough, they’ll give you the opportunity to present it properly and help convince them that you’re worthy of support. That’s why you should be adequately prepared from the start.

Bring in all the necessary documentation and, most importantly, be honest when you present your idea. If the investors decide to negotiate with you, make sure you have a reliable term sheet on you. This will help you record all the important factors during your negotiation and help identify key aspects you will have to focus on.  Keep in mind that the more prepared and more confident you are, the greater the chances of getting the investors to help you out.

Showcase your proof of concept

One thing that both angel investors and venture capitalist have in common is that they require you to present them with viable proof of concept. It means you must present them with evidence that your business idea has the potential to succeed. What it involves is proof that you’ve conducted extensive market research to find an ideal product/market fit. Also, you must show them that your product will address the common issues customers have, in order to make them more interested in making a purchase.

In addition, you must provide investors with social proof as well. That means you’ve connected with your target audience and determined the level of interest and support for your products and services. Also, you must prove that you can handle finances well and that you’re able to support your business even when it’s not doing too good on the market. If your evidence is convincing enough, you’ll be able to secure the support from the investors.

Don’t over negotiate

When seeking support from investors, you must ensure that you benefit from the deal as well. It’s important to set the standards and tell investors which aspects and terms are non-negotiable. This is also good for investors, especially those who are looking for short-term gains. The main reason is that investors don’t have to focus too much on both investment deals and business proposition. In other words, it simplifies the negotiation process.

If both investors and you agree on terms that are not up for negotiation, then you can proceed to discuss more important matters. If not, then don’t be afraid to walk away. After all, you’re trying to establish a balanced partnership and secure investments for your business, not sell off your company. Offering too much flexibility when negotiation terms can lead you in a bad position when the deal is made.

Securing an investment deal for your business venture is never easy. You’ll have to be adequately prepared to face investors and negotiate terms with them. In addition, you must be prepared to convince investors that your business idea is, in fact, worth investing in. Make sure you do your research and prepare in advance before you start negotiating with potential investors.