By Brett Farmiloe
To help you prepare for a meeting with an angel investor, we asked CEOs and business leaders to share their best practices for negotiating and communicating with these investors.
How to negotiate with angel investors
1. Present a solid exit strategy
" Angel investors are hesitant to invest too much into a business when they can't see a clear exit—they want a quick repayment if things go well or poorly. Create a solid exit strategy to show potential investors that they can get their money back as planned, even if your business doesn't grow as projected.
"Keep in mind that most angel investors want to get their money back in three to five years, so don't draw out the repayment strategy too long. When an angel investor hesitates or pushes back during the negotiation process, you'll have the exit strategy prepped and ready to offer them peace of mind."
—Denise Hemke, Checkr
2. Ask other investors for advice
"To negotiate well, you need to fully understand what makes your angel investor tick so you can offer a deal that appeals to them. Go to other angel and capital investors and ask them for advice. Ask what they'd expect from a similar deal. Swing any potential offers you plan to give by this trusted person to see if you're on the right track. When you take the time to practice and prepare with someone who has been in your investor's shoes, you'll enter the real negotiations with more informed asks and confidence."
—Marnix Broer, Studocu
3. Anticipate and address disagreements
"Anticipate potential areas of disagreement when negotiating investment terms with angel investors. This requires thoroughly understanding the investors' preferences, risk appetite, and industry norms. Proactively identifying potential sticking points, like valuation, control rights, and exit strategies, allows you to prepare alternative solutions and persuasive arguments to address these concerns.
"During a recent negotiation with angel investors, we effectively addressed the potential disagreement over valuation by profoundly understanding the investors' industry standards. Through open and transparent communication, backed by data-driven analysis, we successfully persuaded the investors that our proposed valuation was warranted, considering our company's current market trends and significant growth potential.
"Our proactive approach led to a successful agreement, highlighting the importance of preparation, stakeholder understanding, and effective communication in negotiations."
—Normand Chevrette, CME Corp.
4. Pay attention to what the investor is thinking
"Successful negotiation with angel investors will depend on your ability to read their minds. The first step will be to understand if they are genuinely interested in your business and want to contribute. Assuming the answer is yes, you can leverage negotiation points like equity, a seat on the board, hassle-free exit strategy, etc., to strike interesting discussions. Out of these elements, figure out what they are more interested in.
"I have been a part of a successful negotiation with an angel investor by sensing the exit strategy they were looking forward to and negotiating around it. This helped me decide on the equity structures that I would provide and also underline how much assistance I was expecting from them."
—Marc Hardgrove, The HOTH
5. Provide a detailed investment plan
"You don't take out a loan without knowing the purpose, and seeking investment capital works the same way. In order to build trust and get investors to see your vision, you need to provide a breakdown of how exactly new funds will guide your mission forward, down to the dollar. A concrete, detailed plan will provide more flexibility and trust when negotiating contract stipulations."
—Joshua Host, Thrivelab
6. Conduct a thorough valuation analysis
"As an angel investor, what I usually look out for in a pitch deck is a founder's thorough understanding of their business's value and whether they can defend that value under scrutiny. Founders: conduct a comprehensive valuation analysis and gather comprehensive market data to support your valuation. Your transparently articulated understanding of your business's growth potential, competitive advantage, and market opportunity is ultimately what sells me. When I ask questions, I want thought-out answers.
"Doing thorough research and financial projections also empowers founders to negotiate investment terms from a position of strength rather than uncertainty. This strategy ensures you secure a fair deal that aligns with your business's long-term interests and objectives."
—Kevin Miller, kevinmiller.com
7. Utilize SAFE notes
"Negotiating investment terms hinges greatly on your fundraising approach. For many startups at the angel investment stage, a simple agreement for future equity (SAFE) note is the preferred instrument. Using SAFE notes circumvents valuation discussions, which can be challenging given the typically scant data available for early-stage companies to derive a reasonable valuation.
"When leveraging SAFE notes, focus on three primary negotiation points: the funding ask, the valuation cap, and the discount. To justify your funding ask, devise a comprehensive financial model that articulates your short-term operational goals and associated costs, showcasing your business acumen to potential investors. The valuation cap, while not dictated by a specific best practice, should be set as high as possible within reason. Meanwhile, a discount cap is typically set around 20%, a common practice among startups to incentivize early investment."
—Rafael Sarim Öezdemir, Zendog Labs
8. Know your funding needs
"Understanding your funding needs and valuation is crucial when negotiating with angel investors. This knowledge is your compass, guiding you through discussions and empowering you to make informed decisions.
"For instance, during my early entrepreneurial days, I was seeking investment for my tech startup. The discussions were successful largely because I had done my homework—I knew how much capital we needed to reach our next milestone and what percentage of the company we were comfortable offering. This clarity streamlined the negotiations and instilled confidence in our prospective investors.
"When you're clear about your needs, it resonates with the investors, showing them you have a realistic understanding of your business's value and its growth prospects."
—Alexandru Contes, ReviewGrower
9. Build a strong partnership with your investor
"One essential best practice when negotiating with angel investors is to prioritize building a strong partnership. Successful negotiations involve transparent communication, understanding each other's needs, and aligning interests.
"For example, in a recent negotiation, an entrepreneur and angel investor achieved success by openly discussing expectations and finding common ground. They reached an agreement that balanced equity stakes and outlined a clear growth strategy. Trust, collaboration, and a shared vision were the driving forces behind their fruitful negotiation, highlighting the importance of fostering a strong partnership."
—Tobias Liebsch, Fintalent.io
10. Address and mitigate investment risks
"High potential rewards are what drive angel investors, but angels also look to reduce risks. Respond to their concerns by displaying a comprehensive risk management approach. Identify and discuss important risks associated with your venture, as well as a plan to mitigate them. This demonstrates to investors that you have evaluated potential risks and have strategies in place to protect their investment.
"I recall proactively addressing an investor's concerns regarding intellectual property (IP) protection during a discussion. We provided a detailed plan explaining how we planned to secure and enforce our intellectual property rights, including patent applications and non-disclosure agreements with workers and partners. This displayed our commitment to protecting investors' interests and assuaged their fears about risk."
—Edward Mellett, TestHQ
11. Understand your business's value proposition
"One best practice for negotiating with angel investors is to thoroughly understand your own business's value proposition. This includes having a clear understanding of your financials, growth potential, competitive landscape, and unique selling points. By demonstrating a deep knowledge of your business, you can effectively articulate the value you bring to the table and negotiate terms that align with your goals.
"Successful negotiations often involve finding a balance between investor expectations and entrepreneur needs. For example, in a negotiation I was a part of, the entrepreneur presented a comprehensive business plan that highlighted the company's growth potential and market demand. By showcasing the company's unique technology and projected financial returns, the entrepreneur was able to negotiate favorable investment terms, including a higher valuation and a more favorable equity split."
—Luke Lee, Ever Wallpaper
12. Have a clear understanding of your objectives and investors' interests
"When negotiating investment terms with angel investors, be professional and courteous. It's also important to demonstrate that you understand the other party's concerns and interests. When I met with a group of angels to fund my startup business, we had done our research and knew what we wanted in terms of equity allocation and investment milestones, as well as the risks involved with investing in our company. We also had hard numbers to back up our proposal and were able to articulate them clearly when discussing each point at the negotiating table. Ultimately, we found common ground between both parties' interests, which resulted in a win-win deal for everyone involved."
—David Bui, Schmicko
13. Leverage dependencies
"Experts may tell you 10 different strategies when it comes to investment negotiation, but in my opinion, there is only one: always remember to leverage dependencies. In any negotiation, the power to tip the scales rests with the party that is less dependent on the other. There are a few key factors that come into play here:
- Competition: If there are fewer alternatives for the angel investor, the greater your chances to lead the negotiation.
- Brand: If you have established a well-positioned brand that has a stable audience, this again gives you an edge in negotiations.
- Skill: If your business offers superior skill, which ensures a superior product, again, you will have the upper hand in negotiations.
"We have had numerous angel investors, and the scales have tipped both ways. Every successful negotiation we achieved was mainly due to us leveraging the investors' dependencies."
—Richard Kennedy, Arken Digital
About the Author
Post by: Brett Farmiloe
Brett Farmiloe is the founder and CEO of Featured, a platform where business leaders can answer questions related to their expertise and get published in articles featuring their insights.
Company: Featured
Website: www.featured.com
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