Is the offer of investment in my early stage company fair?
When an entrepreneur is looking for investment, the investor is of course the all important focus. The investor (often referred to as a Business Angel) needs to be excited by the pitch and the market potential of the widget (whatever that is), and convinced by the drive, determination and vision of the entrepreneur. The route to market must also be clear, and the position vis a vis the competition explained.
Engaging with an investor through the negotiation part of the deal is a very important part of the process, as most of them look at many opportunities, and can suddenly decide to reject an opportunity for many reasons. You therefore have a small window to make your opportunity the one they choose.
In order of importance we believe that a good 10 minute pitch, or sometimes a video, are the most compelling things investors look at first, with the Executive Summary and the Business Plan coming further down the line. Investors are busy people, and asking them to watch a short video, or attend a pitching session with other companies tends to work well, and be the start of the journey. The crowd funding industry are probably the biggest supporters in insisting that a video is produced for their companies.
The negotiation of the price is an important stage, but by no means the end of the road, as due diligence can throw up some critical issues. At this stage, we will have ensured that all the due diligence documents are in order and available, as we know what documents are likely to be called for. The balance can shift and relations can become more tense as the lawyers and advisers become involved. The process of providing the due diligence must be slick, and Dropbox allows information, and often large files to be shared quickly and efficiently and most professionals are avid Dropbox users.
Investors can sometimes drive a seemingly hard bargain; entrepreneurs, however much they need the money should in the end believe that any deal they accept is fair. It might be painful, but it has to be fair, as from here on, it is a partnership and unless it starts on the right footing, it will probably not succeed. If the accepted deal is harsh on the entrepreneur, then there is always scope for performance related options to be earned, and level up the playing field on a successful exit.
In our experience at Ruffena Capital, most investors are entrepreneurs themselves, successful in one or more businesses, and reasonable people who do not wish to demotivate management by forcing a ridiculous deal. They can also see the merit of performance based options which work for all parties involved, which can be a useful tool to bridge gaps in expectations on valuation for investment.
Life was never meant to be fair, but generally if the deal is done, it is because it is fair to both parties.
By Mark Bunting, firstname.lastname@example.org