Anyone that wants to grow an existing business or start a new one is likely to find themselves in a situation where they require capital. However, many small business owners are not eligible for conventional bank financing. Consequently, they are likely to end up seeking financing from alternative sources such as angel investors or venture capitalists. Here are some things you need to keep in mind when seeking funding from such investors:
See also: How to Get an Investor’s Attention
1. Carry out a background check
Before investors put their cash into your venture, they will first take time to investigate you and your business. In the same way, you should also take time to investigate the investor thoroughly. Since you will be stuck in a close relationship with them for a long time, you need to know what you are getting into. Start by reading reviews about the investor online. What kind of business are they actually involved in? How long have they been in business? Do they have a good reputation? Which businesses have they invested in previously? It would also be advisable to talk to other startups that have worked with the investor before.
2. Create a competitive atmosphere
One of the best ways of negotiating a favorable deal with investors is by creating a competitive environment. If your business idea is innovative, there are likely to be several venture capitalists or investors willing to put their money in it. Therefore, during negotiations, be sure to create the impression that there are several investors that have shown interest in your venture. The more it appears your business is in demand, the more potential investors will want to strike a deal with you.
3. Understand the deal
Before signing the dotted line with an investor, make sure you understand the terms of the deal thoroughly. Since they do this for a living, investors are usually very conversant with the numbers, formulas and terms of the deal. However, some of these concepts might be very new to you. This is why it is very important to read the fine print and ensure you understand every aspect of the deal. In case something is not clear, don’t hesitate to ask for clarification.
4. Be ready to walk away
Your business is your brainchild. Therefore, you need to take the necessary measures to protect your own interests when looking for an investor. Since all investors are profit-minded, they will seek to push you into a deal which favors them most. If you appear too desperate for a deal, they are likely to take advantage of you. Therefore, it is very important to be clear-headed and unemotional when negotiating with investors. If the terms are not favorable, be prepared to walk away, no matter how badly you need the money.
5. Hire your own lawyer
Having a lawyer can be very helpful when it comes to understanding the terms of a deal. However, don’t make the mistake of using a lawyer suggested by your investor. Such a lawyer is likely to work in favor of the investor to ensure that the relationship is maintained for future referrals. Therefore, it is very important to get your own lawyer who is very conversant with these kinds of transactions. An experienced lawyer will explain the terms of the deal and advise you on how to make the terms more favorable.
Have you dealt with an angel investor before? Please share your experience in the comments section below.