Lesson 6: Does Negotiating with Angels Differ?

Does Negotiating with Angels Differ?

Differences and similarities exist between negotiating with angel investors and negotiating with venture capitalists. With both angels and VCs, you need to present a pitch deck, a plan, a view of the size of the market opportunity, projections, and examples of traction. You need to keep both angels and VCs up to date on your progress along the way, highlighting any new customer wins, new product introductions or enhancements, and progress in fundraising to keep your business going forward.

However, the focus of this module is on how negotiating with angels differs from negotiating a deal with VCs. The following are five things to keep in mind when negotiating with angels to get a deal done – five things that do not apply so much with VCs.

1. Communicating about your passion, commitment, and integrity

Emotion (passion, desire, energy, wilfulness, verve… whatever you want to call it) is a much larger component in the negotiating and decision-making with an angel investor. Unlike VCs who are more interested in the cold hard facts, angels are looking at how committed you are and how passionate you are about your business idea.

Therefore, the important thing is to convey passion and energy from the start and all the way through the negotiation consistently. You may not always feel the exact high level of emotion all the time, but you need to be consistent to communicate your passion to the angel because it becomes just as much an emotional decision what to do with their money as it is a business decision. An angel could absolutely love your passion to make the world better in a certain way, even though a VC would likely not even look at your business plan so early in your stage of building a company.

Use your enthusiasm for your idea to get the angel excited about your idea. Your enthusiasm becomes part of your toolbox for negotiating. Your expression of passion for the purpose and impact your company will have could be the one thing to tip the scales in your favour. Convey a sense that, with the investment by the angel, you will go big – and credit (and returns) will go to the angel in the years to come.

2. Discount rate

When negotiating with angels, you need to understand that they get extra favourable treatment because they are looking to invest in you at an early stage. Angels enjoy a discount rate for taking the risk to invest in your start-up early.

The discount rate is often expressed as a discount from the company’s Series A round of financing. What is typical is 20 percent. You cannot ignore this discount rate when negotiating with angels.  Otherwise, you will look unschooled and naïve. VCs do not get this special discount rate because VCs usually invest in a later stage of your company.

3. Valuation cap

Another benefit to an angel that can work in your favour as well is the valuation cap. This rewards the early investor (i.e., an angel investor) for taking the early-stage risks. What this means is the max valuation of the company where the note can be converted in the next round of financing. You’ll want to negotiate the valuation cap.

4. Less emphasis on historical data or financial projections

While VCs will want to see data after data and proof of your relevant experience to back up your financial projections, you don’t necessarily have historical data for angel investors. The good thing is that angels will not expect much in the way of historical data because they know they are investing early.

So, you do not need to put yourself in a terrible disadvantage because you feel bad that you are too early in your company development to show steady financial data.

The angel may want to know your planned burn rate and what you intend to accomplish within a set period, thus being future-oriented.  In negotiating with an angel, it’s likely more about explaining how you intend to use their money to make a positive difference.  Less about showing historical data, as you would with a VC.

5. Speed of decision-making

The decision-making process with angels is usually much faster than for VCs. This is important to keep in mind when negotiating with angels because a moment of impactful storytelling or emotion or an example of your progress could compel an angel to wake up one day and say, “I’ll invest in you and your company. Let’s do it.” Done.

Remember that the angels are investing their own money on their own terms, whereas VCs are investing other people’s money. An angel can make a faster decision. A VC needs to go through a more laborious process, which slows down negotiating and is more dispassionate.

The best thing you can do is to get to know the person – what is important to them, why do they want to invest, what expertise to do they in a certain industry – and keep getting to know them in the negotiation round. Keep asking questions. You can simply start by asking their advice and show respect and humility at every step. Once you get into negotiating a deal, just remember that factors like emotion still comes into play, along with the favourable terms to reward angels for taking the higher risk.