Entrepreneur Workshop - Negotiating the Deal

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Workshop on Negotiation lead by MLA Member Probal Lala.

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Entrepreneur Workshop - Negotiating the Deal

  1. 1. Entrepreneur Workshop Guide to Negotiating “The Deal” with Angels
  2. 2. M L A C O N N EC T S Our mandate is to connect experienced accredited investors, and the brightest, most passionate entrepreneurs in an effective investment process. www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  3. 3. Rye rs o n D M Z www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  4. 4. I N V E S T M E N T H I S TO RY Sentient Magnetic 23 Investments $10 Million + www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  5. 5. H o w D o e s M L A I nv e st ? Considerations: • Management Team • Product/Service • Market Opportunity • Proof of Concept • Go to Market Strategy • The Financial Deal • Use of Proceeds • Exit Pre-Money Valuation? Typically under $4Million MLA has Monthly Investment Meetings Interesting in presenting to members? See Hilary after the workshop! www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  6. 6. M L A Re s o u rc e s Funding Process Pitch Deck www.mapleleafangels.com | info@mapleleafangels.com | Executive Summary 416.646.6235 | @mapleleafangels
  7. 7. Who Am I Telecom Executive - 20 + Years in North American Industry • Former Fortune 100 Executive – Bell, Stentor, Alcatel-Lucent • Current Serial Entrepreneur • Current Angel Investor • Entrepreneur/Youth Mentor • Regular BNN Panelist on “The Pitch” • Expertise in General Management, Enterprise Sales, Operations, Technology Development My Current Gig: - ISP/ Telephone Company and SaaS Provider of Hosted Solutions - B2B Customers Coast 2 Coast - 100% YoY Growth last 3 years www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  8. 8. The Entrepreneur's Dream www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  9. 9. The Quite Often Reality Negotiations should be the Beginning of the Relationship with your investors www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  10. 10. Negotiation Styles Focus on Relationship High Conciliatory (Accommodating) Style -Yield to relation -Lose/Win Collaborative Style -Grow Pie and divide -Win/Win Compromising Style -Divide Fixed Pie -Win/Win & Lose/Lose Avoiding Style -Get what is left - Lose/Lose Competitive Style -Win at all costs -Win/Lose Low High Focus on Outcome www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  11. 11. Agenda • • • • Negotiation Spectrum & Styles Negotiating with Angels – some fundamentals Negotiation with Angels – some common hurdles Q&A Not a Destination but a Journey www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  12. 12. Negotiation Spectrum Concession Collaboration Win-Win Lose-Win Consequence of No Agreement Investor’s Desired Terms BATNA: Best alternative to a negotiated agreement Competition Win-Lose 1+1 > 2 Entrepreneur’s Desired Terms BATNA: Best alternative to a negotiated agreement Trades Trades Consequence of No Agreement The ability to walk away What is Collaborative Negotiation Create joint value and divide it given concerns for the ongoing relationship www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  13. 13. Some Fundamentals • Negotiation starts well before the Term Sheet (or even the initial investment Pitch) • Negotiate “Interests” and not “Positions” • Two Key “Interests” in any negotiation – People and Desired Outcomes : Remember to separate the two ! • Relationships - Its NOT about who you know; Its about who knows you: – Start the relationship well before you need money – Start setting realistic expectations from the get-go – Communicate in the investor’s language and communicate often – Listen actively, Empathize, Establish rapport and then Influence An Encounter .....vs..... Marriage www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  14. 14. The Process • • • • • From Your Perspective and the Angel’s Understand: – Interests – the Measures of Success – Key value drivers in the investment – Leverage – Consequences of No Agreement & Best Alternative to a Negotiated Agreement – Trades Identify areas of agreement and disagreements Frame negotiation as a joint search for a solution Trouble shoot disagreements: bargain & seek alternative solutions, introduce trade offs Agreement and close: summarise and ensure acceptance The better you know yourself and your partner, the better the outcome www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  15. 15. Yo u r I n t e r e s t s • Value versus Valuation – Everyone always thinks that valuation is the most important thing in a deal. However, the structure of the security can be much more important in the long run. – Think beyond the money - credibility, networks, advice and an extra pair of hands (sometimes the money may be good but the rest may not !) • Focus on terms that matter – A typical term sheet will have more than 20 terms spelled out in it. There are only a few that will really matter. – Spend time on the understanding and communicating the unwritten terms – Only then spend time on the concrete terms such as valuation, the type of security, your own compensation and rights, the option pool, and Board composition. www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  16. 16. T h e A n g e l ’s I n t e r e s t s • Angel Investor is an individual investing their personal money and time in an Early or Growth Stage Company in return for – Financial growth – Personal growth – serving as a mentor to CEO or on company Advisory Board or BOD • For many cash is not the only driver • Angel Investing for the most part is Active Investing not Passive www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  17. 17. Angel Interests Continued People: – Investing in what they know – vertical & functional expertise – An entrepreneur they want to (can) work with • Passion, Knowledge & Skills • Skin in the game • Experienced and realistic management team – Other trusted investors/stakeholders Desired Outcomes: – A good “deal” for the risk of time, money and reputation • Realistic sales and marketing plan • An understandable validated value proposition (pain points, urgency, willingness to buy) • A scaleable realistic business model & clear strategy for commercialization • Sustainable competitive advantage (ie. Barriers to entry such as IP) – Leverage – Sufficient Runway (Understanding of cash flow, uses and burn) – Investor exit strategy in 5 to 8 years with sufficient returns www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  18. 18. Measures of Success Entrepreneur • Sufficient runway (cash and resources) to execute to next defined injection milestone • Freedom to succeed (Fingers Out but perhaps Nose In) • Still an owner not an employee • Access to knowledge and networks www.mapleleafangels.com | Angel • Reference able Deal • Bragging Rights • Participation • Fair Valuation/Future dilution • Good Relationship • Peace of Mind • Sufficient runway to execute to next defined injection milestone info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  19. 19. K e y Va l u e D r i v e r s • • • • • • Product solves a real problem Market Management/Advisors Customers Intellectual Property Strategic www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  20. 20. Leverage Entrepreneur • Management Expertise/Advisors • Market Traction or Anticipated Demand • Lead/ Follow-on Investors • BATNA – Competitive bids – Long runway • Leverage Funding – IRAP – FedDEV – SRED • Patents/Exclusivity www.mapleleafangels.com | info@mapleleafangels.com | Angel • Cash • Reference able name • Access to resources • Other Investors • Time • Be careful of expectations set early on • Performance based terms 416.646.6235 | @mapleleafangels
  21. 21. Consequence of No Agreement Angel • BATNA Entrepreneur • BATNA – Other Term Sheets – People who will do a follow-on – Other Investment opportunities • Lost opportunity • Enough Runway ? www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  22. 22. Tr a d e s • • • • • • • • • • • • • Valuation Compensation Non-Competes Type of Security Liquidation Preference Dividend Preference Anti-dilution Provisions Option Pools Board of Directors/ Observer Rights Veto Rights (Protective Provisions) Requirements to buy out investors D&O and Key Person Insurance Restrictions on Founders’ Right to Transfer Shares www.mapleleafangels.com | info@mapleleafangels.com | •Reporting Requirements •Down Round Protection •Drag Along/Tag Along •Convertible Debt Valuation Caps & Discounts •Change of Control •Reps and Warranties •Founder Stock Vesting •Who Pays Legals •No Shop 416.646.6235 | @mapleleafangels
  23. 23. Common Hurdles • People Related: – Assumptions & Miscommunications – Transparency • Financials • Customers • • Milestones • IP Ownership • Third & Related Party Relationships • Cap Table • Resource/People Commitment www.mapleleafangels.com | • Ego • Founder Compensation – Too Low or Too High • Focussing on Position vs. Interest Outcome Related: – – – – info@mapleleafangels.com | Messy Cap-Table No exit strategy Lifestyle vs. Scale-able business Use of Funds 416.646.6235 | @mapleleafangels
  24. 24. Summary • Negotiation starts well before the Term Sheet (or even the initial investment Pitch) • Negotiate “Interests” and not “Positions” • Two Key “Interests” in any negotiation – People and Desired Outcomes : Remember to separate the two ! • Relationships - Its NOT about who you know; Its about who knows you: – Start the relationship well before you need money – Start setting realistic expectations from the get-go • Communicate in the investor’s language and communicate often • Listen actively, Empathize, Establish rapport and then Influence An Encounter .....vs..... Marriage www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  25. 25. References • Strategic Negotiation, Dietmeyer & Kaplan • Getting to Yes, Fisher & Ury
  26. 26. Contact Information Probal Lala, President and CEO About Communications (W) 416.643.3860 www.aboutez.com Probal.lala@aboutez.com www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels
  27. 27. C O N TA C T www.mapleleafangels.com | info@mapleleafangels.com | 416.646.6235 | @mapleleafangels

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