Good investors give you money. Great investors provide you with money, resources, networking, and experience. You need to work hard to attract great investors, with a focus on building a long-term relationship. If you are successful in attracting investor interest, the next step is negotiations. While these negotiations may be cordial, the stakes are high. You need to know how and where your investors’ interests are contrary to yours — where you can and can’t get concessions.
There are two key negotiating topics: economics and control. As to economics, your investors will try to maximize the return-on-investment. Valuation, interest or dividend rates, and liquidation preferences on a sale are often the most significant areas for negotiation. A dollar more of deal proceeds for your investors may be a dollar less for you. Understanding your company’s current valuation and its “waterfall,” or shareholder distribution, in an exit scenario is critical.
As to control, your investors will focus on protecting their investments. Board representation, required shareholder votes, and voting agreements are tools of control. There may be times when your investors need to exercise this control in the best interest of their investment, which may or may not be in the best interest of your company. It’s important to keep your investors’ dual interests in mind.
In the end, you will need to work together to build a structure that will work for all parties.