Photo by Randy Tarampi on Unsplash
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.
7 thoughts on “Angel Investor and Artists: Negotiating”
I like your point about stress related to negotiations, and that inexperience can cause more stress for the investor and entrepreneur. Legal advice does make sense for both parties when they are inexperienced. Your comment on angels who choose not to negotiate and to take or reject the deal at face value should also impact on how an entrepreneur approaches the deal. The founder should make sure the deal is fair on both sides right from the start. It would be important to uncover common interests that may sway the investor toward supporting the deal.
This part of the process seems to be the most intimidating to me. I couldn’t help but think how important it is to be well informed and have a person or team of people that help guide you through this process until you have become well versed in negotiations. I think budding entrepreneurs can be at risk of giving up too much to soon because they need money and need to be careful to really consider what is best for them as well as the investor.
Great post Joy! I agree negotiations for most people can be stressful and full of emotions, because who doesn’t want to close a potential deal, unless it is a bad deal. Negotiating is like interviewing in my opinion, the more you do it the better you will be at it. The beauty of negotiating is that many times there are endless possibilities to be creative within the deal to satisfy all parties involved. I also agree that it is a great idea to seek help in the negotiating process when one is new or inexperienced to the field. Our spreadsheet exercise and how numbers with the small details matter come into play when negotiating for sure.
I have never personally made, what I would consider, a significant investment before but I do see investing in my future and in my company’s future. I think that you broke down the sections of negotiations in an excellent way that I was able to understand really well. I know that negotiations in real estate can be stressful and that really opened my eyes to the process of negotiations. I think moving forward, taking a better approach to understanding negotiations before they happen and while they are happening will help me gain the knowledge I need to invest confidently and gain investments confidently.
Thank you for sharing. As a new business owner, negotiating can be a hard process. Thank you for providing this information.
I imagine as an angel investor, this would be the hardest part for me. I am terrible at negotiating anything, it scares the living daylights out of me. However, I think I may be getting better. As a business owner I quickly realized, sometimes you have to negotiate, sometimes you have to walk away or say no. It is the way of the game. I also imagine it would be hard being a fresh entrepreneur sitting down at a negotiation table with an experienced angel investor who has many deals under belt. I feel I would be too trusting, so if I did not get an honest investor I would make huge mistakes. I would definitely have to have someone on my side of the table to help me through this level of making the deal. Great work Joy!
Negotiating is my favorite part , this is when you will find out if the investor will invest in you. Great job!