Entrepreneur Workshop - Negotiating the Deal

E n t r e p r e n e u r W o r k s h o pG u i d e t o N e g o t i a t i n g “ T h e D e a l ”

w i t h A n g e l s

www.mapleleafangels.com | [email protected] | 416.646.6235 | @mapleleafangels

MLA CONNEC TS

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


Ryerson DMZ


INVESTMENT HISTORY

Sentient Magnetic

23 Investments$10 Million +

http://www.livehivesystems.com/index.html

http://www.livehivesystems.com/index.html


How Does MLA Invest?

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!


MLA Resources

Funding Process

Pitch Deck

Executive Summary

http://www.mapleleafangels.com/entrepreneurs/the_funding_process

http://www.mapleleafangels.com/entrepreneurs/the_funding_process

http://www.mapleleafangels.com/entrepreneurs/the_pitch

http://www.mapleleafangels.com/entrepreneurgeneralresources/executivesummaryexamplefromangelsoftpdf

W h o A m 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


T h e E n t r e p r e n e u r ' s D r e a m


T h e Q u i t e O f t e n R e a l i t y

Negotiations should be the Beginning of the Relationship with your investors


N e g o t i a t i o n S t y l e s

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

Collaborative Style-Grow Pie and divide

-Win/Win

Avoiding Style-Get what is left- Lose/Lose

Competitive Style-Win at all costs

-Win/Lose

Compromising Style-Divide Fixed Pie

-Win/Win & Lose/Lose

Focus on Outcome

High

HighLow

Focu

s o

n R

elat

ion

ship


A g e n d a

• Negotiation Spectrum & Styles

• Negotiating with Angels – some fundamentals

• Negotiation with Angels – some common hurdles

• Q&A

Not a Destination but a Journey


N e g o t i a t i o n S p e c t r u m

Entrepreneur’s Desired TermsInvestor’s Desired

Terms

Lose-Win

Consequence of No

Agreement

Collaboration CompetitionConcession

What is Collaborative Negotiation

BATNA: Best alternative to a negotiated agreement

Consequence of No

Agreement

Win-Win Win-Lose

BATNA: Best alternative to a negotiated agreement

The ability to walk away

Trades

Create joint value and divide it given concerns for the ongoing relationship

1+1 > 2

Trades


S o m e F u n d a m e n t a l s

• 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


T h e P r o c e s s

• 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


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.


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


A n g e l I n t e r e s t s C o n t i n u e dPeople:

– 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 returnswww.mapleleafangels.com | [email protected] | 416.646.6235 | @mapleleafangels

M e a s u r e s o f S u c c e s s

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

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


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


L e v e r a g e

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

Angel

• Cash

• Reference able name

• Access to resources

• Other Investors

• Time

• Be careful of expectations set early on

• Performance based terms


C o n s e q u e n c e o f N o A g r e e m e n t

Entrepreneur

• BATNA

– Other Term Sheets

– People who will do a follow-on

• Enough Runway ?

Angel

• BATNA

– Other Investment opportunities

• Lost opportunity


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

•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


C o m m o n H u r d l e s

• People Related:– Assumptions & Miscommunications– Transparency

• Financials• Customers• Milestones• IP Ownership• Third & Related Party Relationships• Cap Table• Resource/People Commitment

• 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


S u m m a r y

• 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


• Strategic Negotiation, Dietmeyer & Kaplan

• Getting to Yes, Fisher & Ury

R e f e r e n c e s

http://www.amazon.ca/Strategic-Negotiation-Brian-Dietmeyer/dp/B008PGJSYA

http://www.amazon.ca/Getting-Yes-Negotiating-Agreement-Without/dp/0143118757/ref=sr_1_1?s=books&ie=UTF8&qid=1391872753&sr=1-1&keywords=getting+to+yes

C o n t a c t I n f o r m a t i o n

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

[email protected]


http://www.aboutez.com/

mailto:[email protected]


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Entrepreneur Workshop - Negotiating the Deal

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