When angels investors and entrepreneurs begin working on a deal, there are many aspects to consider. Negotiating the finer details of structure, value, support, and roles can cause uncomfortable scenarios to an already tenuous relationship between angel and entrepreneur. Many angels choose not to negotiate for this reason, preferring instead to accept or reject the entrepreneur’s terms at face value. In Winning Angels: The 7 Fundamentals of Early Stage Investing, authors Amis and Stevenson state that angels who prefer not to negotiate may hire a representative to conduct the negotiations with the entrepreneur. This allows them to stay a safe distance from the emotional stress an entrepreneur may experience during negotiations.
However, many angel investors do indeed negotiate terms for their deal. In a previous post, I discuss the power an entrepreneur has to create the terms of the deal. That power is balanced by the angel investor’s willingness to negotiate.
In fact, here is where having a strong constitution comes in handy, because some investors use negotiation as tool to test the entrepreneur’s mettle.
Amis and Stevenson highlight an investor who “likes to negotiate as a test to see how the entrepreneur thinks…He knows that the relationship with the entrepreneur will undergo some significant stress and he likes to see how they hold up under stress right away” (228).
As an artist seeking investment funds from an angel, this tactic can be quite grueling since business is not your everyday playing field. However, making sure you understand exactly why you need funding and how those funds will work for you, will help you during the negotiation process. If you understand your boundaries for the funds, then you will be able to set your own limits and standards with the investor.
Investors will likely have a few tricks up their sleeve to negotiate the most profitable scenario for their investment. An honest angel will try their best to negotiate a deal that is good for both parties. Angel investors who seek to cheat an entrepreneur for profit do not have strong reputations. This should highlight the importance of researching your potential angel investor.
Also, it is important to note that an entrepreneur has some negotiation tricks as well.
When creating the terms of the deal, you have the power to give and withhold gifts, including first looks at future rounds, referrals, networking, and information about progress or opportunities (Amis & Stevenson, 233).
Striking a balance in negotiations for angel investments can bring up a variety of emotional, financial, and egotistical challenges. Artists are often solo-preneurs, and therefore, legal representation may benefit an artist who is in negotiations with an angel investor. If an angel is experienced, then they will have the upper hand, and if the angel is inexperienced, then there should be even more eagerness to include legal council to ensure a strong negotiation process and a successful deal that favors both parties.