Negotiating with Angels: When to Rescue a Funding Deal – and When to Walk Away

You’ve been carefully nurturing an equity investor and now he’s threatening to walk away from the deal. Despite an endless number of presentations, term sheets, meetings with partners and expensive legal documents, it looks like the negotiation is going to unravel.  And that could unravel your business too.

What’s an entrepreneur to do?

You might think that good negotiating strategy demands that you be “willing to walk away”.  That works well when buying a used car, but investors are not used car salesmen.  Before you throw in the towel, ask yourself the following questions:

1. What’s the real problem?  An investor may have spotted a weakness in the business that you cannot yet see.  Take the opportunity to see things through the investor’s eyes.  Probe for the real reasons behind the investor’s objections or suggestions.  Evaluate whether the business as a whole is likely to be more successful by following his advice.
2. What’s my core skill?   Investments often fall apart – sooner or later – because of a disagreement over the roles of founders and key executives.  Maybe the investor sees a weakness in you and wants to replace you as CEO.  If you simply can’t live another day without being the big boss, maybe you’re allowing emotion to ruin a great opportunity.  Step back and decide if you might have more fun, and learn more, in a role other than head honcho.  Plenty of founders – including Bill Gates – find that they can drive the kind of results they crave from a chair other than the one in the CEOs office.
3. Does the investor’s personality fit my team?  Early disagreements could be the sign of something deeper – a cultural or personality mismatch.  When a deal is in jeopardy, get back to basics.  Spend some time with the person away from the negotiating table.  Revisit your background checks and discussions with references.  Is this a person you want to answer to when times get tough?  If you can work through the problems by connecting to the person on a personal level, you may be able to form a partnership that will weather the more difficult days ahead.  (Business doesn’t magically get easier when you have an investor!)
4. What’s the best-case result?  Investors like to worry about the worst-case… turning negotiations into a me-versus-you war game.  Instead of worrying about worst-case, ask what happens if the company succeeds.  Can you and your investor agree on the right incentives to keep the company growing?  For you that means getting paid for success.  For the investor it might mean allowing new investors to come in.  Let go of worst-case nightmares and build a solid case for success.

5. What’s the “AND” solution?  So many business cases appear to be black or white. (Either you accept his terms or you walk away.)  Fortunately, real life allows for more complexity and creativity.  When an investor insists on one thing, find something else to balance the equation.  “I’ll give you a board seat if you give me annual salary increases.”  Instead of saying “OR”, try saying “AND”.  You may be surprised that the result is stronger than either of you imagined.

Finally, if you have gone through these five questions and still can’t see the light at the end of the investment tunnel, perhaps it is time to walk away.  Not every negotiation can be saved – there are people who are not meant to be in business together – but be sure you are walking away for the right reasons.

If the investment deal would jeopardize the business, your mental health, or your passion for growing a bigger company, the best deal you can make might be no deal at all.

Dedicated to your (Investor-Funded) Profits,

David Worrell