When you’re raising money to grow or start your business and have investors in mind, you need a game plan to get funding. Unless you inherited millions of dollars to invest in your ideas, bootstrapping a start-up won’t cut it. Instead, try this five-step plan to negotiate your way to start-up funding:
- Know the numbers.
If you want to get the best offer possible, it’s important to know your company’s financial standing. Define the numbers for the profits of your product or service, how much it costs to sell and how many people are buying it. Calculating these figures is an essential part of negotiating, especially when you are asking an investor or venture capitalist to part with hundreds of thousands or even millions of rands to fund your start-up. Whether you review your financials with your accounting team or consult with outsourced accounting professionals, make sure that you are privy to what is going on financially in your company and prepare yourself to divulge important financial facts that investors need to know. Some other details you need to show in a financial report are projections, your current cash on hand, expenses, revenue history and manufacturing costs. This information can either make or break the deal depending on how you deliver it. That’s why it’s important to prepare in advance and feel confident about your financials.
2. Express non-negotiable standard terms.
When you’re vying for millions in funding, it’s important to clearly verbalize what you will and will not do. Discuss any standard terms that are not up for negotiation. Rather than making your terms so flexible that it requires investors to focus on both the investment terms and the business proposition, simplify the issue by offering standard terms that minor investors cannot negotiate. It will save both you and investor’s time and trouble later, especially the investors who are interested in short-term paybacks.
3. Focus on value.
It’s important to concentrate your negotiation efforts on the value of the deal and not just the valuation. For example, you don’t want to sacrifice a significantly larger portion of equity in your firm than you had initially planned to give. That kind of deal greatly reduces how much influence you have on business decisions for your start-up. Ceding voting rights or control of the board can also leave you with little voice in the company’s decisions, and then the board can easily replace you if a conflict occurs. Instead of getting overexcited and forgoing too much control over your decision-making in the company, devise a plan and consider what values you find the most important. Then ensure that you prioritize them.
4. Aim for understanding.
Be straightforward on what you are trying to communicate when it comes to negotiating terms. Strive to gain an understanding. For example, if your investor wants to get full participation rights with a liquidation preference that triples his investment, make sure that both of you understand what this will mean in the long-run. You don’t want to agree to terms that you are not clear on in hopes to get an investor on board with raising seed money.
5. Don’t lie. Be honest.
It may not seem like it needs to be said but it’s important to be honest when you’re negotiating for millions. Don’t overestimate the valuation of your company based on a product that you have yet to test long enough in your market. Be honest and build a trustworthy relationship with your investor from the start.
When you’re trying to raise millions of rands, it’s vital to be able to negotiate the right way. Be confident in your delivery, and prepare yourself by knowing your numbers. Be honest and focus on what’s important to you in addition to the company’s valuation and have the financial reports to back it up.