Chapter 6 - Negotiating the Deal
IN THIS LESSON
Stop Shooting Yourself in the Foot During a Raise
Early-stage investors typically invest together and, as a start-up, you can expect a round of nearly unlimited follow-ons. One of the biggest mistakes that many founders make once the investment talks are underway is turn away investors simply because they aren’t investing in the whole round.
In other words, telling an investor that you won’t accept their money because the size of the check doesn’t seem substantial to your raise is a huge, unforgivable mistake that will cost you dearly. In most cases this means that the investor will pull out from the investment and let his industry peers about the unprofessionalism they had to deal with. DO NOT MAKE THIS MISTAKE.
Do not turn away investors simply because they aren’t filling your whole round. You are a start-up, after all, and they are the investors. Unless your company is clearly within the bounds of unicorn territory, meaning you already have millions (ideally double-digit growth) and crazy traction, you have absolutely zero business telling an investor to shoo away because the size of their check is not large enough. Once again, do not make this mistake. It will affect your relationship with the investor and may even hinder the outlook of your round. Then again, word can get around very fast in the investor community.
If an investor wants to write you a check for $25,000 – or even $500,000 – and they are accredited, take it. Take the money. Why? Because you are a start-up and you likely need the infusion to scale, grow, and succeed. Granted, there may at times be clear indicators that the potential investor offering the money is a bad fit for your business. In those cases, don’t take a shark deal. However, if the Ts are crossing and the Is are dotting with the potential investor, then it is in your best interest to take the check and use that momentum to drive more investors.
You must think about raising a round of capital as a popularity show of sorts. No investor wants to invest alone at an early stage especially when the start-up has little to no revenues and low traction. That kind of risk is usually enough to have them running for the door. To avoid this situation, focus on building out your round one step at a time. That may mean you take $10,000 here, $50,000 there, and $150,000 over there. It could also mean that an investor offers to cut you a check for $500,000 when you’re trying to raise a $1M round. If, and when, that happens, take the check, and use it to attract more investor dollars. We’ve seen many entrepreneurs push back to investors under the argument that the check was too small. This is a big mistake, and one that you cannot make. Stop shooting yourself in the foot during a raise. Remember, just about any check is a good check, especially at the early stages of your start-up.