When Anthony shook hands with Kevin O’Leary…
The deal was sealed…right?
Well, kind of…
You see, they make everything look easy on television.
Deals this big aren’t solidified with a simple handshake –– come on.
The reality is, Anthony was in negotiations with Kevin’s team for over 2 months before the final deal terms were inked.
Now it’s official –– mcSquares has an investment deal with Shark Tank’s Kevin O’Leary!
And we’re celebrating this incredible moment with something BIG.
Thursday, July 30th at 9:00 AM ET, Kevin will be hosting an exclusive live training call with our members!
Members of my Angel Investing Insider service will not only get access to this special event…
Negotiations can be brutal for both the startup’s founder and the investor.
To help you better navigate those waters, I’ve put together a quick guide to startup negotiations.
Landing The Best Deal
If the deal doesn’t benefit both sides — it isn’t a good deal.
It took Anthony Franco (Founder, mcSquares) two months to finalize his Shark Tank investment deal with Kevin O’Leary.
Both the investor and the startup founder need to have similar goals and expectations. Above all else, an investment starts with a relationship of trust.
If either side is getting too much out of the deal, they will bring the other party down.
In the case of an investor, winning too much in the negotiation can hurt your investment in the long-term. The terms you set can prevent the startup from getting funding down the road.
This is why negotiating a good deal is so tricky.
You walk a fine line — making sure the deal makes you money yet stays fair to the common goal of a successful startup exit.
Negotiating for Investors
Investing in startups is always going to be risky.
Due diligence is about documenting risk so you can make an informed decision on an investment.
Negotiation is about reducing your risk by improving the terms of a deal.
You are never looking for a deal with no risk, but rather looking for a deal where you know what you are getting into.
When a lead investor sits down to negotiate with a founder, they work through the term sheet, acknowledging all of those risks to split them fairly between the two parties.
What Makes a Good Negotiator?
Usually, the lead investor is the one negotiating on behalf of the other investors. They fight for favorable terms and set the stage for future rounds of investing.
These investors should have experience leading deals and a track record of entrepreneurial or investing success.
To successfully negotiate an investor must:
- Know the ins and outs of deal terms and terminology and be able to draft a term sheet
- Understand what terms work with the current market.
- Be stalwart on deal terms, keeping the founders fair especially on the valuation of the company
- Make sure the terms won’t stunt the growth of the startup
- Be willing to join the board of the company and work closely with the founder and CEO
From Pitch to Final Deal
Once an investor has found a potential startup, they will set up a meeting with the founder. This is the pitch deck.
Here, the founder “sells” the startup to the investors, showing off the team, vision, financials, and all relevant information to entice investment.
There can be some amount of negotiation in the pitch itself. If an investor is very interested in the startup, they might start right in on the deal terms.
But, the real negotiation begins once the term sheet has been drafted. This gives both sides the chance to see the full deal on the table. They decide what works and what doesn’t. The startup team and the investor then try to negotiate for a mutually beneficial agreement.
Once both sides have made changes and agreed on the terms, a legal document is made for all to sign.
Tips for Founders
Founders have a lot of work on their end.
They need to search for investors to meet their capital goals and then negotiate terms that satisfy investors — all while still running the company!
Here’s what founders can do to get a fair deal when negotiating.
- Understand the Investor – Make sure you know the capital limits of the investor. Research the investor’s portfolio, financial background, and risk-taking strategy. The offer you make should always be roughly equal to the investor’s financial limits.
- Know the Investor’s Level of Involvement – You must find out the investor’s goals with your particular project. In your pitch, you should be clear as to what you expect from the investor, including their position in the company and level of involvement.
- Build Trust – The negotiation, term sheet, and long-term relationship with your investor all rely on trust. Investors are trusting you to take the company in the direction you laid out. You can build trust by showing your honesty, competence, and reliability throughout the pitch and negotiation.
Negotiation Key Terms
To understand pitch decks, term sheets, and deal negotiation, there are a few terms you need to know.
Equity is the amount of money that would be returned to a shareholder (investor) if all of the assets were liquidated and all of the company’s debt was paid off.
Equity is just how much of the company an investor owns.
For angel investors, the deal usually comes down to how much equity they can buy and for what price. This can change depending on the amount of capital being raised, the valuation of the company, and the other investors.
A term sheet is a document that outlines the terms and conditions of a deal. It defines the key points of the agreement between the founder and investor. This document isn’t legally binding, rather it is the precursor to the final, legal document.
Entrepreneurs try to raise the needed capital while keeping value for the company, while investors try to ensure they will make adequate ROI upon the company’s exit.
After the pitch, the term sheet is the last chance to get to know your founder. This is where you can see who they really are — what are their intentions and what compromises are they willing to make.
This will set the stage for the entire relationship between the two parties.
It all comes down to the term sheet.
A cap table is a spreadsheet or table that shows the capital structure of the startup. This just means that the document shows how much of the company each shareholder owns.
This includes common equity shares, preferred equity shares, warrants, and convertible equity.
The tap table is important because it shows a lot about the startup and founders. Most importantly it shows who has invested in the company and what kind of a share the founders and leaders are taking.
Negotiation-Free Startup Investing
The JOBS Act has fundamentally changed the angel investing world. Now thousands of investors across the U.S. are investing in startups on Regulation Crowdfunding platforms.
One of the nice things about this approach to investing in startups is that there’s no negotiation involved for the investor.
If you find a startup you like and the valuation and deal structure make sense, you can make your investment immediately… often with as little as $100.
The process is very straightforward.
In fact, many members of our angel investing service aren’t long-time investors with years of experience under their belt — just regular people trying to improve their portfolio and build wealth.
It’s a great place to earn your wings as an angel!