Negotiating with potential investors


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Negotiating with potential investors

  1. 1. Negotiating with a PotentialInvestorFebruary 17, 2010
  2. 2. Overview
  3. 3. Preparing for the Investment Process and Due Diligence Expectation
  4. 4. While the investmentprocess duration canfluctuate wildly, theorder of this timeline isfairly consistent withmost investors.In general, you canexpect to spendbetween 3 and 6 monthsfrom the initial investorconversation to closing. 4 © 2010 SJF Advisory Services
  5. 5. The timeline will change substantially depending on a number of things. Here are somefactors that can adjust the timing and ways you can address them. Factors Stalling Ways to Stay on Track or Accelerate Process ProcessInvestors’ own schedule •  Create competition among investorsand priorities •  Indicate that you may not need capital 6 months from now or valuation expectations may be higherWaiting on anticipated •  Exceed financial projectionsmilestones and financial •  Win new business or opportunities that were not originally in planexpectationsLack of access to due •  Have all due diligence documents ready and well organizeddiligence materials, •  Be prepared to provide list of customers, vendors, past employers andreference sources partners for reference callsSurprises that spock •  Anticipate potential hiccups over next six months and disclose to investorsinvestors •  Better to prepare them with potential bad news than catch them off guardTerm sheet and investor •  Do your own due diligence on the value of your businessdocument negotiations •  Hire qualified counsel to help navigate terms 5 © 2010 SJF Advisory Services
  6. 6. Confidentiality Agreements (CA) / Non Disclosure Agreement (NDA) Investment Committees, Investment Recommendation Memos Syndicates, Lead investors Investment models, IRR analysis Pre Money, Post Money6 © 2010 SJF Advisory Services
  7. 7. Will send out formal check list to call participantsDiligence area Documents/Information requiredManagement/ Resumes for management and board, personal references, board packets/meeting notesBoardMarket Sales pipeline, qualitative discussion of current and expected products and services, competition matrix, sales and marketing materials, customer and supplier contracts, customer referencesTechnology, IP All patents and IP review, technology development roadmaps, past or pending IP disputesProduction, Inventory,& asset lists, efficiency improvements needed/equipment upgrades required,Operations production capacity with current facilities, quality control standardsFinancials Historical IS, BS as detailed as possible in Excel format, most recent audits/tax returns, projections for next 5 years IS, BS, CF, detailed uses of cash and future capital required, AR, AP schedules, detailed information providing back up for cost assumptionsEmployment Employment contracts/non-competes, recent payroll report, employee work and training manual, retention data, organization charts with open positions, recruiting plansLegal Incorporation docs, cap table with all previous round investment documents/term sheets, bank financing documents, any other legal docs, insurance coverage 7 © 2010 SJF Advisory Services
  8. 8. Full disclosure - send everything you have; easier to supply everything than toweed through materialsDon’t recreate the wheel – if you have already prepared a document for internaluse, your board or another investor, just share thatFace to face meetings often more efficient - Many questions are best answeredwith in person meetings instead of document overload; suggest investor spend1-2 days at your office talking through their prepared list of questionsLet them be a third wheel – copy them on internal company correspondence, letthem dial in to sales calls (when appropriate), invite to marketing events andtrade showsBe easy to work with – Develop a good rapport with the investor from thebeginning and the process and term negotiations should be fair and transparent8 © 2010 SJF Advisory Services
  9. 9. Finding the right investor The investor who offers the most money or the investor who takes the least amount of ownership interest is not always the best fit. Things to ask:   Does the investor have experience in your industry?   What value added experience would the investor bring to your organization?   What is the investor’s time horizon before exit?   Does the investor have the capacity to infuse additional capital as needed?   How does the investor plan to interact with the business Things to consider:  Research background, check reference, etc. •  Talk to business owners who worked with the investor in both successful and unsuccessful businesses •  Talk to investors who have invested in deals alongside the investor •  Evaluate core competencies •  Past history/track record •  Background check on key principals of firm •  Airplane test   Listen to questions investor asks   Conduct a clear conversation about personnel requirements   Negotiate without emotion The ideal investor: Shares your vision to grow the business Brings more to the table than money• Copyright © 2010 ICIC – 1
  10. 10. Negotiating with a PotentialInvestor