If your project is really very unique, many investors will be knocking on your door. It is very important not to react too quickly to initial requests by potential investors to sign the term sheet. Any signs of excitement and eagerness to sign them on will lead to the investors having the upper hand, leaving the entrepreneur with less options, resulting in a less than favourable deal for your team. Mr Inderjit Singh – The Art and Science of Entrepreneurship
New entrepreneurs, especially those who are raising money for the first time, may seem very inexperienced in such matters and this will allow the investor to take control of the situation.
Initial excitement may give the impression that there are no other investors on board for your deal and thus the investor will take advantage of such a situation, seeing that the team needs the money desperately.
Another problem is that investors will try to cut you off from talking to other investors so that they can take control of the situation and curb you from getting better deals from other investors. Investors are also in business, they are looking for the best deal possible with their money. It is essential to remember this, that investors are not doing you a favour, they also want the best for themselves out of the deal.
Often, in the initial stages potential investors will throw you a very big carrot to entice you. They will offer very attractive valuations in the hope you will stop talking to other investors. Once you have cut off the other potential investors and left your fate to the one or two quickly decided investors, then the fun starts, where the investors will look for all the reasons to start cutting down on the valuations. The process can be drawn out, and one can easily get so entrenched and trapped by it that in the meantime, the other interested parties or investors would have moved on. At this point, there will be very little room for you to maneuver, often leaving you at the mercy of the investors’ terms and conditions.
It is therefore crucial to do your research and talk to more investors. A few more options will help you to gauge the best choice better. It will also give you leverage and better understanding when negotiating for better deals.
To keep the upper hand it is best not to not jump at the first investor who comes along, but to keep a few engaged and excited, and only at the right time, further along into the process, you can choose the one or two you really want to partner with. This is called the competitive process, and the lack of one will leave you on the losing end.
There will be some potential investors who will want you to sign an exclusivity agreement with them, which means that you are not allowed to discuss the deal with anyone else while they are evaluating your deal. This is done to avoid any competition for them, so that they can evaluate without much pressure. You should avoid exclusivity agreements unless there is a very special offer, or if the potential investor is prepared to offer a very high valuation compared to the others in return for an exclusivity agreement or if the investors is really a very special one. In general, avoid an exclusivity deal unless it is for a very short duration, which will allow you to catch up with other potential investors who might have been locked out of your deal during the exclusivity period.
Always endeavour to be in the driver’s seat, so that very early in the process, the potential investors will get a good insight and feel of what your team is looking for and are excited to partner you. Let them be excited but don’t show your excitement.