Don't burn bridges with any investors

12/10/06
By Joseph Ollivier Printed in the Deseret News

Entrepreneurs have a lot of things in common. For example, almost all of them believe their product or service will generate significant revenue if only they can gather some capital to get started. Most are secretive about their product and are afraid that their concept will be stolen or copied. It is common to see entrepreneurial valuations that are not in the realm of reason.

An idea by Bill Gates may translate into a concept worth millions, but for most of us, ideas are worth very little in embryo form.

While the person who comes up with an idea may think it is worth $5 million and that he should retain 90 percent of ownership, even the most benevolent angel investor may offer only $500,000 for 40 percent of the company - and even that might be in the form of a convertible note rather than straight common share equity.

Therein comes the rub.

The investor and the entrepreneur are a long ways apart. The investor thinks the entrepreneur is completely unrealistic about the value of the concept, and the entrepreneur believes the investor is trying to steal the company. Ill feelings are often created by these differing perspectives, and stories begin circulating - each one complete with quotes.

And another possible bridge for future funding is burned.

Following is some advice for entrepreneurs as they meet with investors:

  • Yours is the position of weakness in the negotiations. Everyone knows that, so why not admit it? That's why you should thank the investor for taking the time to look at the project. Remember: He who has the gold makes the rules.
  • Explain how much is needed to fund the project to the point of a second funding round, or to first revenue dollars.

  • Explain the project concept in the simplest of terms. Make sure to point out what independent research and test markets have shown.

  • Provide the investor with a copy of the business plan, executive summary, term sheet or whatever is available.

  • Provide realistic projections for the company, showing where it can be in three and five years.

  • Indicate what portion of the company is available for the funds requested, and have a good reason for valuing the company as you have.

  • Understand that most investors believe that they should own at least 30 percent of the company, so asking for money in return for 5 percent to 10 percent of the company will not fly.

  • Freely admit to the investor that his level of financial sophistication is superior to yours, and assure him that you are confident you can work together to come up with an equitable arrangement. You might even ask in what form would the investor like the investment to be: convertible notes, preferred stock or maybe an addition of warrants.

    • The key here is to not burn bridges with the investor and to leave the dialogue open. If this project doesn't work, then there will be another project down the road. You will want to be able to come back and cross that bridge of good feelings so you can comfortably approach the investor again.
Mr. Joseph Ollivier is associated with the BYU Center for Entrepreneurship. He can be reached via e-mail at cfe@byu.edu.