STEP 5: Negotiating, or Put Your Best Deal Forward
How much of your company are you going to give up and at what terms? And how much haggling will there be along the way? If you haggle, remember that you're negotiating with people who are going to be your investors. The trick here is to align everyone's interests. The position you want to end up with, says Amis, is "It's you and me against the world" as opposed to "It's you against me."
During negotiations, angels tend to focus on the numbers, specifically their initial ownership stake. They believe that will have the greatest impact on the future value of their investment, so many will bargain hard over it. Angels also have the advantage of time: While you may need their investment quickly, they most likely don't face the same time pressure. On the contrary, many angels prefer to take their time during negotiations, not least of all in the hope that you'll eventually come around to their terms. You've been warned.
Some angels will enlist a lawyer, an angel investor who is not involved in the deal, or another professional to do the negotiating for them. Yet others maintain a strict policy of not nego- tiating at all. When those angels see a deal they dislike, they simply reject it and move on.
There's no reason why you, the entrepreneur, can't take the same no-negotiate position. Put forward your best deal and say -- politely -- that it's a take-it-or-leave-it proposition. If you're asked why, simply say you don't want to start your relationship on adversarial footing.
STEP 6: Support, or They Want to Hold Your Hand
An angel's investment should be just the beginning of the interaction. Unfortunately, many entrepreneurs, and the people who invest in them, see it as an end point. As a result "entrepreneurs only get 5% to 10% of what they could out of the relationship," Amis says.
That's dumb. By this point in the process, the angels' interests and yours are in alignment. The angels have invested in you and your company and most likely are entrepreneurs, too. So feel free to solicit their help in any way you can. Angels can and should help you find potential customers, follow-on investors, key staff, suppliers, and more.
Angel investors can also help your company move toward what investors call "value events." Those are anything that can improve the real or perceived monetary worth of your company, as well as its chances for success. Examples include signing deals with strategic partners, lining up venture financing, and landing a well-known account.
But keep in mind, support should be a two-way street. The best entrepreneurs provide regular updates, maybe two pages' worth sent once a month, to all their investors. Not only does that let the investors know what's going on, but it also makes them feel they're an important part of your company.
Also, adding a note to your update along the lines of "We are currently trying to contact XYZ Industries to see if we can make it a customer," might jog an investor's memory. Maybe an investor just happened to have been seated next to someone from XYZ at a charity dinner last week. Stranger things have happened.
STEP 7: Harvesting, or They're in the Money
Harvesting is what investors call the process of getting back their investment -- and then some. You'll impress your potential angels by agreeing to do everything in your power to help them achieve a positive harvest -- one in which they make a profit. That is the way they measure the success of their investment. Positive harvests come in five basic forms:
WALKING HARVEST. Your company distributes cash directly to its investors on a regular basis.
PARTIAL SALE. Your investors sell their stakes to your com- pany's management, another shareholder, or an outsider.
STRATEGIC SALE. A competitor acquires your company for strategic reasons; your investors receive their negotiated share of the acquisition price.
FINANCIAL SALE. A buyer outside your industry acquires your company for its cash flow; your investors receive their negotiated share of the acquisition price.
INITIAL PUBLIC OFFERING (IPO). Your company sells stock in the public markets, creating a market for your investors' shares.
Investors use the phrase negative harvest to describe what the rest of the world calls bankruptcy. Whether it's a Chapter 11 or Chapter 7 filing, bankruptcy is not a pretty sight. If your company files for Chapter 11 bankruptcy, your investors will have a shot at regaining at least some of their original investment. But if you go into Chapter 7, your investors will typically get little or nothing.
Bottom line? From day one, start talking to your angels about how they'll cash out. For example, during the negotiation process you might say, "Two to three years from now, it might make sense to sell to X."
Your commitment to cashing out your investors must continue after you have gotten their checks. For example, you might say that your salary will remain fixed until the company is sold. In your updates to shareholders, periodically mention potential buyers of your company -- and what you're doing to increase their interest.
May the angels be with you.
Paul B. Brown is the author or coauthor of 12 books and editor-in-chief of DirectAdvice.com. Additional reporting was provided by associate editor Thea Singer.
Please e-mail your comments to editors@inc.com.
Related link on Inc.com: Directory of Angel Investor Networks
