Deal negotiations 101 for angel investors

The purpose of deal negotiation is – obviously – coming to a deal. Not just any deal, but a mutually beneficial agreement for both the investor(s) and the startup. Angel investing is much more than the “set it and forget it” type of traditional investing and, as such, a successful deal negotiation should be the beginning of a transparent and fruitful partnership for years to come. 

Here’s what angel investing deal negotiations usually look like and why they often include a lot of give and take. 

What does the negotiation process look like?  

Deal negotiations happen when angel investors spot a promising new investment opportunity. The most common ways angel groups find good new deals include general networking, referrals, startup pitch events, online investment platforms, and applications by the startups themselves. A warm introduction from a mutual contact over email or a phone call is a great way to bring a deal to the angel group’s attention.

Once the opportunity has been validated and the most promising deals filtered out, detailed due diligence and negotiations begin. The negotiations include a series of discussions to define the specifics, including pricing, terms, responsibilities, rights, and obligations, as well as addressing potential concerns and mitigating risks. 

The negotiation process can take time and requires a lot of open and transparent back-and-forth communication. Building a strong relationship with the founders is the foundation of your partnership and long-term success. 

These are the most common steps of angel investment deal negotiations: 

1. Express interest – let the startup know you’re interested in them and willing to invest. 
2. Request information – ask for detailed information, e.g. financials, a business plan, and any other relevant documents to assess the company. 
3. Set up a meeting – this could be a real-life meeting, video call, or even a phone call. The meeting should be about getting to know the founders, their vision, and their business, and for them to learn more about you as an investor.
4. Communicate your investment criteria – set the stage for the negotiation by letting the founders know what you're looking for in an investment, for example, in terms of the startup's stage, the amount you're looking to invest, and on what terms. 
5. Understand their goals and needs – ask questions about their growth plans, funding needs, and specific challenges they're facing. 
6. Review the term sheet – if the interest seems mutual, ask for their term sheet. Read it carefully, and ensure you understand all the terms and their implications. This is where the formal negotiation process begins.
7. Ask questions and clarify – ask questions about any terms or conditions you don’t understand. Make sure you have a clear understanding of what you’d be agreeing to.
8. Negotiate responsibly – startup investments are a bit like marriage, tying the knot isn’t the destination but the beginning of a journey. To form a strong, collaborative partnership, you must be fair, reasonable, and mindful of the startup’s needs. 
9. Seek legal counsel – involving legal counsel can be a good idea at this stage. An experienced attorney can help you navigate the legal aspects of the negotiation, draft or review legal agreements, and ensure your interests are protected.
10. Document your agreement in its entirety – make sure everything you agreed upon is documented in legally binding agreements. This includes the investment agreement, shareholder agreements, and other relevant documents.

The full list only describes a successful deal. At any point throughout the negotiations, you need to assess the information and decide whether to move forward to the next step. 

The foundation of a successful deal – due diligence 

Due diligence is a critical part of negotiating a successful deal – and of course, knowing if the deal is even worth pursuing in the first place. Thorough and well-rounded due diligence should cover all aspects of the startup's business from financials and operations to the legal details. This is the only way you can make informed investment decisions. 

Read more: Due diligence in angel investing

Due diligence should be conducted throughout the negotiation process. Once you’ve expressed interest in a startup, you can ask for various documents and information to understand the business better. The pitch deck the startup initially submitted only provides a snapshot of the business, and based on this information, investors can only decide whether to move forward to the due diligence phase.

Make sure that you have obtained and reviewed all necessary information before committing to anything. You need to know the startup’s current state and true potential to negotiate the terms accurately. Due diligence should be pretty much finished before finalizing the legal documents. 

The core of a successful deal – compromise and balance 

Angel investing is more than just a financial transaction. It's about building a partnership between the founders and investors. In addition to capital, angels also contribute expertise, mentorship, and networking opportunities. The success of the investment is often tied to the collaboration of the investor and the founders. Therefore, compromise and balance are at the core of angel investment negotiations to help build a strong and sustainable partnership. 

Read more: 5 ways angel investors can help startups succeed (besides funding)

Early-stage startups face uncertainty and challenges and, therefore, need the flexibility to adapt. Also, maintaining the founder's motivation is crucial. Compromising on certain terms can help balance the interests of all parties, mitigate reasonable risks, and leave room for pivoting and growth. 

How to make sure the negotiation process is a success – for all parties? 

1. Be open and transparent from the start 

Take the time to understand each other’s goals and concerns – both the motivation of the startup founders as well as your investment goals, e.g. expected returns, exit strategies, and involvement in the business. Make sure both parties have realistic expectations about the startup's growth and the timing of potential returns. 

All parties should have clear roles and responsibilities early on to prevent distrust and conflict. This includes involving all investors in the syndicate and agreeing on the decision-making processes including board seats, etc. 

2. Communicate often and well 

Trust and rapport are critical for a successful partnership. Good communication is at the centre of a good working relationship – throughout the negotiation process and beyond. After a successful deal, establish a system for receiving regular investor updates from the startup. This helps build trust and transparency regarding the company's progress and financial health. 

3. Be flexible 

As said, the terms should be balanced and flexible enough to keep all parties motivated. Negotiations should involve both give and take, so compromise where possible. Leave room for unexpected challenges and changes. Flexibility is mutually beneficial because this should become a working partnership, not a one-time deal. Put the future of the business above short-term gains. 

4. Get your papers in order 

Make sure that you’ve documented all the agreements you’ve negotiated and that all parties understand them the same way. Clear and comprehensive legal documentation is crucial – involve legal counsel when necessary. 

Also, include agreements about how you resolve future disputes or disagreements. A structured conflict resolution process can prevent minor issues from escalating into major ones.

10 commandments to negotiating a good deal 

1. Do your homework – before entering any negotiation or deal, make sure you understand the startup and its industry – from its financial health and intellectual property to its customer relationships. The more you know, the better. Also, pay close attention to the team – often, the people are more important than the industry they’re in. 
2. Know your investment criteria – define your investment criteria and stick to them. If other experienced investors are participating in the deal, it can be a good sign, but it’s your skin in the game and you should act accordingly. 
3. Valuation matters – negotiating the valuation is one of the most critical aspects. The valuation should be fair and align with the startup's potential, stage of development, market potential, and industry benchmarks. 
4. But valuation isn’t everything – also consider other terms and governance to mitigate risks, like equity ownership, liquidation preferences, board seats, protective provisions, and other factors. 
5. Understand the term sheet – make certain you mutually understand the investment and what each term means to you, e.g. the equity ownership, liquidation preferences, board seats, and protective provisions. 
6. Build a relationship – you're not only investing in a startup but also in people. Build a good relationship with the founders and other investors. Trust and communication are key to a successful investment. A good deal should align the interests of both the investors and the founders.
7. Be prepared to walk away – don’t let the fear of missing out drive your decisions. You can always walk away if you have concerns about the terms or the startup's potential. 
8. Diversify, diversify, diversify – make sure you diversify across multiple startups to mitigate risk and increase your chances of success.
9. Talk to experts – if you feel out of your depths, seek advice from experienced angel investors, attorneys, or financial advisors. 
10. Consider the long run – angel investing is often a long-term endeavour. Be patient and realistic about the timeline for potential returns. Having a clear exit plan can be a positive indicator.

Remember that "good deals” are mostly subjective. Every negotiation is unique, the key to success is your ability to adapt and make informed decisions. Lastly, always act honourably and professionally, as your reputation is an important asset in the angel investing world.