Thursday, June 22, 2017

Negotiation of Startup Funding

For the budding life science entrepreneur, you want to establish an agreement with the investor that works in the long term. Negotiation of an agreement cannot be avoided, but need not be onerous. As discussed earlier in Structuring An Early Round Investment, there are several different structure strategies which can be deployed. The actual structure depends on the results of the negotiation. Similarly, Valuing Your Life Science Startup is a component of the negotiation.

Negotiation is not uniquely different for the life scientist in a business framework versus in any other aspect of life. Components to consider include:

Power differential. Who has the power?
  • Are you desperate for money and can't proceed without the investor? 
  • Are you unable to run the company without input from the investor? 
  • Are you hoping that the investor will help you establish a qualified board? 
  • Or recommend key team members. 
Alternatively, is everything in place and your project is so compelling that you need little from the investor some cash?

Personality.

  • Are you an introvert who does not enjoy playing games with other people and who repels from any aspect of manipulation. In this case, be upfront and tell the investor that the deal is the deal and you're not interested in wasting a lot of time going back and forth. Highlight to the investor that this deal is not capricious but has been well thought-out, and it is fair in your mind and is a win-win solution for both parties.
  • If you are more extroverted and enjoy the experience of working with a car salesman to purchase the car at the lowest price, then you have an entirely different strategy. In a sense, you find the negotiation to be the fun part and will feel cheated if you don't get the best deal. Understand that if your investor is also of a similar bent, this will be a long protracted experience which potentially both of you will enjoy. It could also turn really nasty. If the investor is more introverted, you may have just lost that investor as a partner.
We all want to win. With the exception of the above car salesman analogy, almost every negotiation is best done with the assumption that both parties win. Funding a startup is not a zero-sum game.
You need adequate monetary support, guidance, autonomy, and motivation in the form of company ownership to successfully launch your business. Your investor needs a certain return on investment, risk profile, and a sense that your startup will add value according to their belief system. In your negotiation, make it clear that you want the investor and you to both win.  A good investor will understand a win-win scenario. An investor who disagrees should be told to look elsewhere.

Be aware of triangles. Negotiation is almost impossible if it involves more than two people. With every additional person, you increase the number of pairs of negotiation several fold. With three people there are three times as many negotiation requirements. That includes the entrepreneur negotiating with two investors, and the two investors negotiating between themselves. This makes the process substantially more complicated and should be avoided at all costs. You can easily calculate the danger of having four members in the negotiation. Get the investors to agree to have a lead and accept their terms. And only negotiate with the lead. If a non-lead won't buy into that, dump them before you waste a lot of time.

Final advice. Negotiation is not something new to you. You have been negotiating for things your entire life and have strategies that work and strategies that do not work. As opposed to the earlier topics, this is familiar territory. Do not change how you negotiate at this critical moment of your life. Choose a strategy that works for you, has a high comfort level and typically achieves the outcomes you want. If you hate buying from car salespeople, now is not the time to decide you want to become a high-pressure negotiator.

The Startup ProcessSourcing - Evaluating - Valuing - Structuring - Negotiating - Supporting - Harvesting

Reference: David Amis-Howard Stevenson (2001). Winning angels: the seven fundamentals of early-stage investing. Pearson Education.

2 comments:

  1. Brad,

    Great post. It's interesting to think about each of the personalities of the investor and entrepreneur. As you mentioned, simply having a different combination of personalities could either make a deal terrible or great. This was something I hadn't quite thought of before, but it's clear to me now that if you (for example) had a homogenous team of people who agree on the style of negotiation, things would look a lot different than, say, an introvert entrepreneur and an extrovert investor.

    Austin

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    1. The more I look into the introvert/extrovert issue the more I am impressed how key it is. As an introvert I gain energy from small meaningful interactions. A day talking and strategizing with an Angel would be a blast. A reception full of Angels where I have to make a 2 minute pitch is a total nightmare. For that reason I love how the Internet is changing things. No doubt an extrovert would be totally different. They seem to get their energy from an audience and quickly lose interest in small and intensive groups.

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