June 9, 2013
The following answers are provided by the Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.
The only thing standing between your product/service and your vision is money. Getting an investor to buy into this vision provides the means necessary to turn this vision a reality, or so you hope. If an investor says “no”, response is easy; try, try again. But what happens when an investor says yes, but at a lower offer? The proper course of action is a bit more murky.
That’s why this week we asked the YEC crew to answer the following question: “Should you ever negotiate with investors who offer far less than you asked for? Why or why not?” Their answers are below.
8 Ways to Handle a Lowball Investment Offer
1. Play the Long Game With Investors
Investors are not in the transactional business — they are in the relationship business. That means you should look at each investor as a relationship that you’ll nurture over time. Some of my favorite “investors” never actually invested in my company but offered their time and encouragement and oftentimes would be an outside resource I could turn to for help. If you develop a positive relationship with an investor and aren’t able to come to terms or feel the investment won’t work out, keep communicating with them and build a long-term relationship. You never know when or where that relationship may pay off.
2. Consider Your Options
Don’t burn those bridges, but instead opt to keep them warm. If you are able to attract more competitive offers, these other investors may fall in line once they see how the rest of the market is pricing your deal.
3. Don’t Sell Yourself Short
You should absolutely not negotiate with an investor who offers far less than the asking price for a business unless that said investor brings a very important intangible to the table, such as expertise in some area or back-end infrastructure that is worth more than the monetary difference. Instead, try to leverage the investor’s interest into more lucrative offers from competitors.
4. Recognize Value
Price is only a small part of the equation. As a fundraising entrepreneur, you care about value. If an investor offering a lower price can bring greater value, it should absolutely be negotiated. If there is an offer, there is interest — extract value wherever possible.
5. Play the Negotiation Game
You don’t want to nickel-and-dime an investor for no reason, but appropriate negotiation is part of the game when fundraising. Some investors actually feel cheated if you don’t negotiate because if you just grin and bare it, they feel they could have given you an even lower offer and gotten away with it. It’s cognitive dissonance — you appreciate things more when you’ve had to work a little bit to get them. The same goes for investors. Now, it’s probably not wise for a company that’s a month away from the dead pool to be super picky, but investors don’t want to feel like you’re just taking whatever you can get.
6. Have Multiple Investors and Valuable Connections
Investors don’t always have to bring in capital; they can also bring in human capital with their investment. Right now I have two investors who we have been negotiating with on our Tunebash music project. One is offering less money on the first round but is offering a huge amount of connections, while the other is offering a lot of money but doesn’t seem to be as well-connected. Having multiple people scouting the investor role is important. This allows us to create the best deal for our company as possible. You define your terms, not the investor. Just make sure it’s legal in how you are getting the capital, and work with a lawyer who has experience in this area. Some lawyers will push back the cost until the financing deal has been structured.
7. Learn From Investors’ Insights
The conservative investment offer is a teaching moment and points to areas of growth for a company’s apparent or real value. Whether the weaknesses are in the business plan itself or the entrepreneur’s skills as a salesperson, entrepreneurs can only benefit from the insights an investor can provide when given the chance. By all means, negotiate with the investor with the understanding that an exchange of ideas may result in a more bullish buy-in from them, a strengthened pitch or business plan from you.
Anyone who walks away from the negotiating table having gained no new knowledge or insight is doomed to face difficulties as they build their business. Every negotiating table serves food for thought. Funding is just the main dish.
8. Tactfully Move On
If you’ve managed to recruit other good investors for what you are asking, then you should tactfully move on. You want investors who are excited about what you are building, and the ones you have to nitpick with over valuation aren’t very excited.
Did you like this article?
Get more delivered to your inbox just like it!