| Written by: Martyn James, ETFS Capital, | 10 Feb 2020
How important is good preparation before negotiations start?
Without wishing to state the obvious, proper preparation before negotiations start is critical. Most of the time founders are great at getting over the first hurdle; perfecting their pitch to clearly convey their business idea. But sometimes, after finishing those discussions about the brilliant idea, the clarity as to exactly what they are looking for disappears.
When seeking investment, founders also need to be clear about all those aspects which fit around their core idea. This is from the very basics, such as the amount of capital and valuation they are seeking, through to the type of investor they want to bring on-board and the associated involvement they want from them. For us, it is just as important to have a clear vision on the size, shape and type of investment being sought, as it is to have an amazing business idea. For example, a founder may be looking for an investor to just provide capital and walk away – and that’s not us.
Another key part of the preparation is ensuring the founders have really thought through their roles and how the dynamic works between them. With early stage businesses, there’s often little to go off in terms of proven ideas, let alone assets or revenue, so the decision on whether to invest has to be based on the people, especially the founders.
Aside from the quality of the individuals, we always want to be confident that the founder team are themselves comfortable as to how their respective roles sit alongside each other. If there is an imbalance between the founders in terms of who’s generating value and who’s benefiting the most, it can be concerning.
I’d say it’s key to think carefully beforehand about who’s doing what and why, and how sustainable that dynamic is going to be over time. Founders should have honest conversations between themselves about whether the apportionment of their equity and the value expected to be generated by each of them is aligned. If it’s not, then they really should address this before talking to potential investors.