Why should entrepreneurs intentionally be generous when negotiating with investors?
Generous is not a word often associated with talking about negotiations between startup entrepreneurs and their investors. It’s often more all about fearing how tough VCs are going to be with their term sheets and ‘standard’ clauses.
As well as how to work with pre and post-money valuations. This instantly puts founders on guard, in a defensive position.
Generosity is nowhere on their radar. They are just fearfully trying to hold on to everything they can from investors they are trying to build relationships with, but can’t trust.
Why choose to be generous instead? Even when you don’t have to?
1. “The Secret to Success is Generosity”.
This quote by Ekaterina Walter really sums it up. If you can care enough to be generous with introductions, opportunities, your time, and empowering others, you’ll reap great rewards. Dealing with investors shouldn’t be an exception to this rule.
Ekaterina has worked with Fortune 500 companies and has started and sold her own startup. She is speaking from experience.
2. Build Loyalty & Trust.
Wouldn’t you like more loyalty and trust from your investors, board members and business partners? How do you expect them to act that way if you are acting the opposite even before day one?
These are the typical questions I would ask all the entrepreneurs that participate on my fundraising training.
Both startup founder Chris Myers and multi-billionaire Li Ka-shing have said they share the philosophy that entrepreneurs should be leaving money on the table for their partners and investors.
They believe it builds loyalty and trust. It’s a sign you have their best interests at heart too. You’re not just trying to take their money or just anyone’s money.
3. It Says a Lot about You.
How generous or greedy you are says a lot about you. At the beginning of any startup, the decision to invest and fund you is pretty much all about you. That can be true virtually all the way through your Series A. It will continue to be a partial factor.
Do you think an investor who has worked hard for decades, and has made many financial sacrifices, or has even gone through the ranks of startup life is going to just hand out money to greedy people, or generous partners?
Not that wanting to make money is a bad thing at all. Some VCs and angels will definitely want you to be seriously ambitious about making money. Otherwise, how are they going to get a return?
4. One Day You’ll Need More Money.
Startups seem to be raising later and later rounds. You might even go through a Series D or E. You’ll often want those first investors participating.
Even if not, they may need to bless the terms. Even if you don’t need to raise any more money for this venture, there is a high chance you’ll be onto creating several more startups or your own fund. There’s an even greater chance you’ll need them then.
Plus being able to raise from the same investors can be far more efficient and profitable. As long as you treated them well the first time.
5. One Day You’ll Need a Lot More Generosity Than Just Money.
Things rarely go according to plan, on your schedule as a startup. You’re going to be asking your investors for a lot of generosity in their patience, more money, introductions, and all types of daily operational help.
6. You Want Them Emotionally & Actively Invested.
Making the relationship purely about money is going to create the completely wrong dynamics for a truly fruitful entrepreneur-investor relationship. If money is all you want, go to a bank and get a business loan instead of trying to raise from angels and VCs.
The purpose of these investors is to get top, very well connected, expert talent in your corner, who are eager to do everything they can to make the venture a success. Not just sitting in the distance nagging you about a check every now and again.
7. Your Reputation is on the Line.
There are absolutely some benefits of being known as a tough and skilled negotiator. Though if you have a reputation giving bad deals, you may not have anyone to negotiate with in the future. Even if you do, it will definitely impact the attitude they are coming to the table with.
8. You’ll Need More Investors.
In this startup or the next, you’ll need more investors. You’ll need many investors to participate in a variety of fundraising rounds.
Word of your generosity or greed will get around in investor circles fast. It will open the doors to introductions and investor meetings, or close them.
There really aren’t that many angels and VCs. Not compared to potential customers or lenders.
9. It Can Return Some of the Best Rewards.
If you haven’t given giving and generosity a shot yet, you’ll find that it can return some of the best rewards of your startup journey for your entire lifetime.
You can be making a difference for them, and then those they impact with that return.
10. One Day You May Be an Investor too.
Like many of these angels I’ve interviewed on the DealMakers podcast, you could well exit this venture and go on to become an investor yourself. How would you like your founders to be when you invest? Greed or generous?
Why would entrepreneurs be generous in negotiations and dealing with their capital investors? It turns out there a lot of very valuable reasons.
Check out this list, and you might just reconsider your approach. Still, be diligent in negotiating and arranging fair and profitable deals. Though this approach just might get you more of what you really want and need for your startup.