Negotiating with a Business Angel Investor
By VentureGiant.com 

The internet is saturated with articles based on 'how to pitch your idea', how to draft, plan, practice and implement your pitch to perfection - ad nauseam. But there simply are not enough articles and resources on how an entrepreneur should negotiate with a potential angel Investor and the types of questions that should be asked. This can be a real disadvantage and Venture Giant intends to provide more articles on assisting entrepreneurs’ with the techniques needed in negotiating numbers and structuring deals with Business Angel Investors.

Before beginning this article I want to pass on how important a well thought out investment summary is as part of your angel investment pitch. You think you have one already? Take note that your investment summary is NOT the same as your executive summary! Your 'investment summary' is a vital part of the angel capital raising process and is of particular interest to an angel investor because it answers the question of what's in it for them! This is essentially your elevator pitch condensed into a paragraph. What makes your business idea an attractive angel investment opportunity? How much angel finance is needed? how will you spend your angel capital? Your investment summary must address all of these. if you have not crafted an investment summary and are in the process of creating one, this article is a must: How to create the Investment summary an angel investor will find irresistible!

We also strongly recommend reading the article: giving away equity in return for no investment - it's a contradiction to what we are trying to achieve here, granted, but it showcases an interesting scenario where an angel investor's contribution may be worth more than the angel investment or capital that is required for injection!

This article intends to set out the groundwork to understanding what types of questions you may wish to consider before deciding to accept or reject an investment proposal from a potential business angel investor.

Asking the right questions at the right time could end up benefiting you in one of three ways:

• Better terms - in term of investment vs. % share equity;

• Not-losing a deal - because you have incorrectly valued what the business angel can actually bring to the deal and are focusing only the capital investment;

• Walking away from the deal - because you have uncovered 'red-flags' or the investment deal simply does not feel right to you. Sometimes 'trusting your gut' and walking away from a deal can end up saving you more long-term.
  

With an impartial stance in mind, an entrepreneur must always remember that angel investment is a value proposition for both sides and past experience as well as success rates of a business angel investor must be valued and quantified by an entrepreneur looking to raise investment.
 
The first real consideration for an entrepreneur to make when seeking to raise angel investment capital is to consider a realistic market value on his/her business before even considering entering into any kind of negotiation or investment pitch with ANY business angel investor. But how do you do this for a Seed or early stage investment proposal? How do I value my Seed or early-stage business correctly.

Another consideration is how scalable your business is. Generally the more scalable your business is, the more interest it will attract from angel investors and your business plan should be carefully crafted to support scalability and growth on a city wide, state, country, and/or Global level. Your Angel investment proposal and investment summary should always aim to create a cookie cutter template model that is scalable and can be easily rolled out.

Your negotiation pitch with an Angel Investor should also address what your firms growth strategy is. The ideal growth strategy that you pitch to an angel investor will usually be influenced by your enthusiasm and ambition of where you want to see your business or company in 5 years. Always remember that Angel investors are searching for future potential and the article above explores all of the viable growth methods available to an entrepreneur and the expansion methods in particular that an Angel investor will like more than others!

The next real negotiation point to consider is how much of your own funds have you invested into your business? Business Angel Investors will want to see as much investment capital from an entrepreneur as possible and the reason for this is if you have a serious financial vested interest in your company and its success - you will likely work harder to insure that the business succeeds. If you have invested your own funds into your business idea or established business then before proceeding forward, please familiarise yourself with the article why angel investors will expect you to have invested in your company first.

Valuing an angel investor’s possible future contribution to your company is no mean feat by any standard and a lot of it will rely on your own due diligence in combination with your intuition. The due diligence process must always begin from asking the right questions in combination with following up and checking up on them after your subsequent meetings with a potential angel investor. So the following checklist is by no means exhaustive but should set a good foundation for the type of questions you should be asking and considering.

• Business Angel Investor Checklist

To start with it is a good idea to ask a potential investor to sign a Non disclosure agreement (or NDA) before disclosing any sensitive facts and can do no real harm for any party. There is a modern school of thought that debates whether or not an NDA is an enforceable legal agreement or not, however, the fact remains that when an entrepreneur insists that a business angel investor or third party signs the agreement before entering talks, it sends out some very clear positive signals, namely:

• That you are serious about your idea or business.

• That you have made it clear, and in writing that you are now entering talks in areas that you feel are confidential and do not want the information that is discussed (or documents that you have disclosed) passed on without your permission.

• And, that best case, if a business angel investor (or third party) simply states that they do not wish to sign the NDA (for whatever reason they may give) then that will be a clear indication that you should be on-guard and less co-operative on the quantity of information you are asked to provide to the business angel. The usual reason for an angel refusing to sign an NDA is that they are already working in areas that conflict with the non-disclosure agreement; and that would be your first red flag that should seriously make you think twice on the amount of information you are willing to disclose.

A further list of questions that an Angel Investor may ask you can be viewed here: Angel investor questions to an Entrepreneur

Once the ‘Non-disclosure agreement’ is signed, consider:

1) Has the business angel investor worked in your industry and if so what is his/her experience level?

2) What resources does the business angel investor already employ that can be plugged directly into your business?

3) What resources does the business angel investor have that you as an entrepreneur may be able to leverage? Example, access to office property, access to staff, existing know-how?

4) From the business angel investors past investments, how many of them are similar to your business and industry?

5) Could you leverage some of the business angel investor’s assets to directly benefit yours?

6) What experience does this business angel have in your industry?

7) Has the business angel Investor operated and exited from a similar business as yours? If so, what were the results and how much of it was as a direct result of this Investor? Would the investor be comfortable with you contacting the entrepreneur (s) involved in that business? If not, why?

8) How profitable are the Business Angels existing businesses? Asking this question and verifying this with companies’ house can be quite revealing.

9) How many investments have the business angel made in the past? This is a crucial question as it will always be a lot easier to deal with someone who has been an angel before, and has experience in angel investing over someone who has money to invest but has not invested in an entrepreneur before.

10) If the angel investor has made previous investments, would the business angel investor be willing to provide you with contact details of entrepreneurs that are working (or have worked) alongside the business angel, so you may contact them to discuss what sort of support level the entrepreneur has received?

11) What payback period is the business angel investor realistically looking at?

12) And finally, True Net Worth - Though you may never know the exact figure from your potential business investor, understand as a rule of thumb that a business angel investor should have at least 10 times the investment amount of liquidity available. So if you are asking for £75,000.00, the Angel Investor should have £750,000.00 cash or assets that are easily convertible to cash over the short term whilst also being able to service their debts. This is not a question of wealth, but affordability!

A real business angel investor must always be seeking to win, but more importantly, also be willing to fail. Willing to fail can only come ultimately from affordability and the ability of being able to lose the invested money!  A business angel, alongside their investment capital must provide strength to a business relationship and this strength can not come from someone who is in constant fear of losing their investment.

We have had a lot of emails from Entrepreneurs who have requested information on What types of UK Limited company shares should be offered to Angel Investors. This article is one of the few articles on the internet that we found that actually explains the difference between the different types of UK limited company shares that should be transferred to an Angel investor in exchange for angel Investment and the different types of financing options available to an entrepreneur. You should always seek independent advice from a professional before consummating an angel investment deal, but understanding the broad strokes of the different types of UK limited company shares is essential!

Though this list above is definitely not exhaustive, it may potentially reveal ‘red flags’ that you should be vary of, and is a good starting point to some of the questions you may want to ask in due course and part of your due diligence process before receiving investment from a business angel investor.

If you can not come to terms with an Angel Investor, the next best strategy may be look at your angel funding requirement. How much Angel Investment Capital do you actually need?

Always bear in mind that Angel Investors today have many choices and each part of the angel investment process is an opportunity to assess the capability of the entrepreneur. Calculating the amount of angel funding that your business ACTUALLY requires is one of the most important steps in the process - too little and you are undercapitalised - too much and you could look opportunistic. You may find that you actually do need £35,000 not £50,000, and if this is the case, your Equity to Angel investment will be that much lower! 

This article explores how to balance out the amount of Angel Funding that you are asking for, with the equity that you are seeking: How much funding do you actually require for your Seed or early stage project?

Angel Investment Venture Giant is a premier UK business Angel investment network and small to mid sized business networking portal that matches active business angel investors with entrepreneurs' seeking investment capital and business funding. 

  
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