When dealing with investors your business should be looking to get the best deal. This means keeping as much equity in your business as you can for as much finance as you can negotiate. This guide will give you a better understanding of how to hold on to your equity when negotiating with investors. This guide explains:
Investors will make you an initial offer called a 'term sheet'. It sets out the basic nature of the deal. It will set out what is for sale and how much they are going to invest for the equity. These details are not legally binding and they are open for negotiation. It is advisable to get legal advice during the negotiations as the language used can be complex.
Investors contemplate risk when they make an investment. The higher the risks the higher the percentage of equity ownership that an investor will look for in your business. You need to downscale the risk and therefore hold a larger equity position in your business. You can do this by showing an investor how much of your own money you have already invested or are looking to invest in your business. This shows your commitment to an investor who will know that you are not going to walk away if times get tough leaving them with no chance of a return. You should also show an investor a sound business plan for the future growth of your company to build even more confidence and less risk.
If you have a choice of investors it becomes easier for you to decide which one to go with and the terms you are willing to accept. You are in a stronger position if there is more than one offer in front of you. The negotiations will be emotional as you are on the verge of giving up some control in the business you have grown from a start-up. But you must be confident. You are equal partners. The investor wants something you have and vice-versa. Ask yourself if an investor is offering enough for the size of equity they are after. Don't be intimidated and go for the first offer you receive. If you are not happy with the equity share then walk away and wait for a better offer.
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