Entrepreneur Workshop - Negotiating the Deal

Entrepreneur Workshop
Guide to Negotiating “The Deal”
with Angels

M L A C O N N EC T S

Our mandate is to connect experienced accredited investors, and the brightest, most
passionate entrepreneurs in an effective investment process.

www.mapleleafangels.com

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info@mapleleafangels.com |

416.646.6235 |

@mapleleafangels

Rye rs o n D M Z


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416.646.6235 |

@mapleleafangels

I N V E S T M E N T H I S TO RY

Sentient Magnetic

23 Investments
$10 Million +

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416.646.6235 |

@mapleleafangels

H o w D o e s M L A I nv e st ?
Considerations:
• Management Team
• Product/Service
• Market Opportunity
• Proof of Concept
• Go to Market Strategy
• The Financial Deal
• Use of Proceeds
• Exit

Pre-Money
Valuation?
Typically under
$4Million

MLA has Monthly Investment
Meetings
Interesting in presenting to
members?
See Hilary after the workshop!


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416.646.6235 |

@mapleleafangels

M L A Re s o u rc e s

Funding
Process

Pitch
Deck


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Executive
Summary

416.646.6235 |

@mapleleafangels

Who Am I
Telecom Executive - 20 + Years in North American Industry
• Former Fortune 100 Executive – Bell, Stentor, Alcatel-Lucent
• Current Serial Entrepreneur
• Current Angel Investor
• Entrepreneur/Youth Mentor
• Regular BNN Panelist on “The Pitch”
• Expertise in General Management, Enterprise Sales, Operations,
Technology Development
My Current Gig:
- ISP/ Telephone Company and SaaS Provider of Hosted Solutions
- B2B Customers Coast 2 Coast
- 100% YoY Growth last 3 years


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416.646.6235 |

@mapleleafangels

The Entrepreneur's Dream


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416.646.6235 |

@mapleleafangels

The Quite Often Reality

Negotiations should be the Beginning of the Relationship with your investors

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416.646.6235 |

@mapleleafangels

Negotiation Styles

Focus on Relationship

High

Conciliatory (Accommodating)
Style
-Yield to relation
-Lose/Win

Collaborative Style
-Grow Pie and divide
-Win/Win

Compromising Style
-Divide Fixed Pie
-Win/Win & Lose/Lose

Avoiding Style
-Get what is left
- Lose/Lose

Competitive Style
-Win at all costs
-Win/Lose

Low

High
Focus on Outcome


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416.646.6235 |

@mapleleafangels

Agenda

•
•
•
•

Negotiation Spectrum & Styles
Negotiating with Angels – some fundamentals
Negotiation with Angels – some common hurdles
Q&A

Not a Destination but a Journey


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416.646.6235 |

@mapleleafangels

Negotiation Spectrum
Concession

Collaboration
Win-Win

Lose-Win
Consequence
of No
Agreement

Investor’s Desired
Terms

BATNA: Best
alternative to
a negotiated
agreement

Competition
Win-Lose

1+1 > 2

Entrepreneur’s
Desired Terms

BATNA: Best
alternative to
a negotiated
agreement

Trades

Trades

Consequence
of No
Agreement

The ability to
walk away

What is Collaborative Negotiation
Create joint value and divide it given concerns for the ongoing relationship


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416.646.6235 |

@mapleleafangels

Some Fundamentals
• Negotiation starts well before the Term Sheet (or even the initial
investment Pitch)
• Negotiate “Interests” and not “Positions”
• Two Key “Interests” in any negotiation
– People and Desired Outcomes : Remember to separate the two !
• Relationships - Its NOT about who you know; Its about who knows you:
– Start the relationship well before you need money
– Start setting realistic expectations from the get-go
– Communicate in the investor’s language and communicate often
– Listen actively, Empathize, Establish rapport and then Influence

An Encounter .....vs..... Marriage

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416.646.6235 |

@mapleleafangels

The Process
•

•
•
•
•

From Your Perspective and the Angel’s Understand:
– Interests
– the Measures of Success
– Key value drivers in the investment
– Leverage
– Consequences of No Agreement & Best Alternative to a Negotiated
Agreement
– Trades
Identify areas of agreement and disagreements
Frame negotiation as a joint search for a solution
Trouble shoot disagreements: bargain & seek alternative solutions, introduce
trade offs
Agreement and close: summarise and ensure acceptance

The better you know yourself and your partner, the better the outcome

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416.646.6235 |

@mapleleafangels

Yo u r I n t e r e s t s
• Value versus Valuation
– Everyone always thinks that valuation is the most important thing
in a deal. However, the structure of the security can be much
more important in the long run.
– Think beyond the money - credibility, networks, advice and an
extra pair of hands (sometimes the money may be good but the
rest may not !)

• Focus on terms that matter
– A typical term sheet will have more than 20 terms spelled out in it.
There are only a few that will really matter.
– Spend time on the understanding and communicating the unwritten
terms
– Only then spend time on the concrete terms such as valuation, the
type of security, your own compensation and rights, the option pool,
and Board composition.

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416.646.6235 |

@mapleleafangels

T h e A n g e l ’s I n t e r e s t s
• Angel Investor is an individual investing their
personal money and time in an Early or Growth
Stage Company in return for
– Financial growth
– Personal growth – serving as a mentor to CEO or on
company Advisory Board or BOD

• For many cash is not the only driver
• Angel Investing for the most part is Active
Investing not Passive


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416.646.6235 |

@mapleleafangels

Angel Interests
Continued

People:
– Investing in what they know – vertical & functional expertise
– An entrepreneur they want to (can) work with
• Passion, Knowledge & Skills
• Skin in the game
• Experienced and realistic management team
– Other trusted investors/stakeholders
Desired Outcomes:
– A good “deal” for the risk of time, money and reputation
• Realistic sales and marketing plan
• An understandable validated value proposition (pain points, urgency, willingness to
buy)
• A scaleable realistic business model & clear strategy for commercialization
• Sustainable competitive advantage (ie. Barriers to entry such as IP)
– Leverage
– Sufficient Runway (Understanding of cash flow, uses and burn)
– Investor exit strategy in 5 to 8 years with sufficient returns

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416.646.6235 |

@mapleleafangels

Measures of Success
Entrepreneur
• Sufficient runway (cash
and resources) to
execute to next defined
injection milestone
• Freedom to succeed
(Fingers Out but
perhaps Nose In)
• Still an owner not an
employee
• Access to knowledge
and networks

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Angel
• Reference able Deal
• Bragging Rights
• Participation
• Fair Valuation/Future
dilution
• Good Relationship
• Peace of Mind
• Sufficient runway to
execute to next defined
injection milestone


416.646.6235 |

@mapleleafangels

K e y Va l u e D r i v e r s
•
•
•
•
•
•

Product solves a real problem
Market
Management/Advisors
Customers
Intellectual Property
Strategic


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416.646.6235 |

@mapleleafangels

Leverage

Entrepreneur
• Management Expertise/Advisors
• Market Traction or Anticipated Demand
• Lead/ Follow-on Investors
• BATNA
– Competitive bids
– Long runway
• Leverage Funding
– IRAP
– FedDEV
– SRED
• Patents/Exclusivity

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Angel
• Cash
• Reference able name
• Access to resources
• Other Investors
• Time
• Be careful of expectations
set early on
• Performance based terms

416.646.6235 |

@mapleleafangels

Consequence of No
Agreement
Angel
• BATNA

Entrepreneur
• BATNA
– Other Term Sheets
– People who will do a
follow-on

– Other Investment
opportunities

• Lost opportunity

• Enough Runway ?


|


416.646.6235 |

@mapleleafangels

Tr a d e s
•
•
•
•
•
•
•
•
•
•
•
•
•

Valuation
Compensation
Non-Competes
Type of Security
Liquidation Preference
Dividend Preference
Anti-dilution Provisions
Option Pools
Board of Directors/ Observer Rights
Veto Rights (Protective Provisions)
Requirements to buy out investors
D&O and Key Person Insurance
Restrictions on Founders’ Right to
Transfer Shares


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•Reporting Requirements
•Down Round Protection
•Drag Along/Tag Along
•Convertible Debt Valuation
Caps & Discounts
•Change of Control
•Reps and Warranties
•Founder Stock Vesting
•Who Pays Legals
•No Shop

416.646.6235 |

@mapleleafangels

Common Hurdles

• People Related:
– Assumptions & Miscommunications
– Transparency
• Financials
• Customers
•
• Milestones
• IP Ownership
• Third & Related Party Relationships
• Cap Table
• Resource/People Commitment


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• Ego
• Founder Compensation – Too Low
or Too High
• Focussing on Position vs. Interest

Outcome Related:
–
–
–
–


Messy Cap-Table
No exit strategy
Lifestyle vs. Scale-able business
Use of Funds

416.646.6235 |

@mapleleafangels

Summary
• Negotiation starts well before the Term Sheet (or even the
initial investment Pitch)
• Negotiate “Interests” and not “Positions”
• Two Key “Interests” in any negotiation
– People and Desired Outcomes : Remember to separate the two !

• Relationships - Its NOT about who you know; Its about who
knows you:
– Start the relationship well before you need money
– Start setting realistic expectations from the get-go
• Communicate in the investor’s language and communicate often
• Listen actively, Empathize, Establish rapport and then Influence

An Encounter .....vs..... Marriage

|


416.646.6235 |

@mapleleafangels

References
• Strategic Negotiation, Dietmeyer & Kaplan
• Getting to Yes, Fisher & Ury

Contact Information

Probal Lala,
President and CEO
About Communications
(W) 416.643.3860
www.aboutez.com
Probal.lala@aboutez.com


|


416.646.6235 |

@mapleleafangels

C O N TA C T

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416.646.6235 |

@mapleleafangels

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