Calling the world of startups a ‘game’ can, at times, seem a pretty apt description. The high stakes, the heavy falls, the rolls of the dice and remarkable tales of success over adversity can make for a heady atmosphere and an enticing one for those with a healthy predisposition for adrenalin.
The involvement of potentially large sums of money however, does tend to focus the mind away from the Hail Mary approach and negotiations between investors and startup entrepreneurs can often feel like anything but playtime.
Money makes the world go around and, vitally for a startup, it also keeps the office lights on and the development team coming back every day to build out the masterpiece. In reality, without money to sustain itself, a startup might consist of nothing more than hard drives full of useless code or a half finished product, useful to no one. Therefore a few strings attached to a potential investment shouldn’t ever matter if it keeps a startup going, right? Not so much.
Human nature dictates that we all want control and have the ability to take charge and own our destiny. Investors get involved in businesses because they see an opportunity to grow their hard-earned dollars into something more and to do so at a rate they can’t get anywhere else. It’s an unusual investor however, who will simply trust an entrepreneur to spend their money wisely at all times and, therefore, by way of a term sheet, they invariably look to place restrictions and demands on each of their precious dollars injected into the company.
For entrepreneurs who are commonly invested as much mentally in their startups as they are financially, the idea of being controlled by an outsider can be extremely uncomfortable.
For entrepreneurs, being clear on what you are willing to give and take, and more importantly, knowing what you’re willing to walk away from, is key to long term success for a new business. Investor attention can be intoxicating, their interest alone is an endorsement of the business, however all money is not equal and one of the biggest mistakes young entrepreneurs make is thinking that because it’s been offered, it must be accepted.
Entrepreneurs pivot on a daily basis. They see what isn’t working and find ways to adapt and keep moving forward. Funding a startup is no different. Claustrophobic investor terms, with no room for compromise, have the power to suck the life from a startup and, at worst, sink it altogether.
Know Where You Stand
Predators can smell fear. This being the case, in the wild, we know to stand smiling stoically as the salivating grizzly rears to its hind legs in front of us. In the investing world, desperation can be smelt on the wind and startup entrepreneurs need to be able to hold their nerve.
When startups are raising money, they typically do it because they need it for growth and scaling or simply to keep those pesky lights on. This ‘need’, if not kept in check, can easily cloud an investment negotiation. Much like a big cat waiting out the slow demise of the lame Gazelle, investors can sense desperation and will wait it out.
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If it seems that a startup only has a few months left before cashflow runs dry and problems start, investors will use it to their advantage and the perilous financial situation will shape the conversation rather than any of a startups future prospects. It’s a subtle change, but its one that places investors firmly in a position of power and entrepreneurs with little opportunity to change the terms being presented.
As an entrepreneur, entering a negotiation fully understanding your position both commercially and personally as well as the investors’ can pay great dividends. The negotiation of a term sheet is just that, a negotiation. If both sides aren’t willing to accept some level of compromise, entrepreneurs should be just as empowered to walk away as investors, and should be encouraged to do so.