[VICTOR V. BUBUIOC] Winning Angels: Insight Into Entrepreneurial Financing: Part 5: Negotiating

[BUBUIOC INC.]

“Let them have it your way”

-       Howard Stevenson

Negotiating should be about making everyone happy to be working together, what we know as a win-win situation. By this point, you likely know that this is not always true. Often times we have win-lose, and even some lose-lose situations.  Gouging will likely lead to a no-win situation and happens when the entrepreneur is pined down for a low valuation and aggressive terms.

The choice to negotiate or not is dependent on the individual and his or her personal style. According to research done by Amis & Stevenson we learn that many investors do not negotiate. This is explained by the desire to “maximize the likelihood of a positive relationship” (p.226). Many of these investors just go with the flow and simply follow the proposal suggested by the entrepreneur. If the proposed terms are outrageous they walk away from the deal - “Thanks but I’m not interested at this price”.  The “take a pass” approach is in fact a passive and yet powerful negotiating technique given the right circumstances.

Naturally there are investors that do like to negotiate. The investors that negotiate do it for reasons one might easily deduct: impact on terms, role, price, structure…and so forth. Also, interestingly enough, these investors see negotiation as a “prelude” to the relationship to come from engaging in a venture. There are other reasons for negotiating. For example, Peter Pichler and Jeff parker use negotiating as a test to determine how will the entrepreneur perform in, what will likely be, one of many future negotiations.

Although the choice to negotiate or not is a personal choice, it is tied to some external factors such as how early or late they enter in to the picture, how much time they have available, and desired role or level of involvement. The most important part of negotiating is leverage or negotiating power. Some have it while others do not. If you think about it, most investors have the upper hand from the start. This is because generally speaking the entrepreneur seeks the investor and rarely the other way around. The more successful the investor is the more power they have. Even the “lucky” one-time winners are perceived as having negotiating leverage.

Professor Robert Robinson of HBS says that: “the first objective in any negotiation is to openly get the issues on the table”. This method helps identify the needs and wants of the involved parties. Robinson communicates the need for the investor to understand how attached most entrepreneurs are to their “baby”.

Acording to Amis & Stevenson, most investors:

·      Focus on the numbers: initial ownership stake

·      Spend a lot of time and wait for the entrepreneur to bend

·      Come out fighting for more of the pie

And the winners:

·      Don’t negotiate personally. They feel it is an unneeded process and let others deal with it. They wait until the second round.

·      They seek a cooperative relationship. Build trust. Don’t leave the entrepreneur short changed. The win-win.

·      Screen out the greedy.

·      The entrepreneur’s ego is at play.

·      Connect ownership to performance.

·      A small piece of a larger pie is preferred to no pie at all.

Robert Robinson, co-authors of Angel Investing argues that negotiating is consistently misunderstood and provides three important concepts to help improve execution skills. These being interests -what you care about; issues – items on the table for explicit agreement; and positions –your stand on various issues. He continues to make an important distinction by dividing the three concepts into Positional vs. Interest-Driven negotiations. Positional is like a “dance” fine tuning up and down, while the Interest-Driven attempts to balance conflicting interest.

Ultimately, negotiating between investors and entrepreneurs is not much different than the negotiations you might engage in on a daily basis. Anytime we negotiate we want to come out on top, as does the other side. Ideally we find a mutually beneficial agreement, the sweet spot. Unfortunately this can’t and won’t always be the outcome, and when that happens just do what Mr. Stevenson does: “let them have it your way”.

For more on this topic please see:

Winning Angels: Insight Into Entrepreneurial Financing: Part 1: Sourcing
Winning Angels: Insight Into Entrepreneurial Financing: Part 2: Evaluating
Winning Angels: Insight Into Entrepreneurial Financing: Part 3: Valuing
Winning Angels: Insight Into Entrepreneurial Financing: Part 4: Structuring

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Posted By BUBUIOC INC. to VICTOR V. BUBUIOC at 6/19/2013 10:54:00 PM