Do angels negotiate hard with entrepreneurs? What if you can’t work out an agreement on ownership?
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Sridar Iyengar
Bessemer Venture Partners
I know a lot of entrepreneurs who actually come and say: at the time of the IPO of my company, I want to end up with 25% ownership. And from that they will work backwards and say, this is what I want now.
I tell them: Look, focus on what you are trying to build. Ten percent of a billion dollars is better than 50% of a hundred million.
In negotiating with an angel or a VC, you want to end up where both are equally dissatisfied with the result. That’s the right balance—the investor thinks he gave too much to you, and you think you gave too much to the investor.
If one of you is happier than the other, then it feels the same as when I am buying rugs. When I’m walking away from buying a carpet, feeling like I have got a great deal, and the guy smiles and says “Thank you”, I feel, “God! I got screwed again.”
I think you should not end up in that position, so I encourage entrepreneurs not to negotiate too hard with their angels.
But do angels negotiate hard with entrepreneurs?
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R. Ramaraj
The Chennai Fund
Actually investment bankers tell us there is a big formula for arriving at ownership percentage. But for the first deal, I guess it was a question of the fact that we felt a little soft at that moment and, I think, kind.
If I was wearing a different hat, maybe I would have taken closer to 50% for this deal. But I felt that what we did, taking 28% was a signal to everybody else about the kind of deal we were doing, and we just wanted the deal done.
What if you really can’t work out an agreement on ownership, even if you feel you are not negotiating hard?
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Pradeep Gupta
CyberMedia and Indian Angel Network
Difficult to say, but then there are a number of instruments by which you can work a variable valuation.
For example, if I am putting in half a million dollars and if I say that the money buys me 25% of the company; that makes the valuation of the company $2 million.
But perhaps the entrepreneur feels the valuation should be $4 million because this is a great idea, and it’s going to become a $100 million dollar business in five years.
That is the sort of thing that you will work out using some sort of a warrant. I would say, fine, if what you’re saying happens, then the valuation is $4 million. You can have ownership back. But right now it is $2 million.
Sridar Iyengar
Bessemer Venture Partners
If the entrepreneur proposes this type of structure, I say, absolutely.
Because when they get that ownership back, it is because of the fact that they have built additional value. And while I am not getting as much of that additional value because the entrepreneur is getting more ownership, I am getting some of it.
And the entrepreneur is committing to building that value, as that is the only way he will get back to the equation he wants. I think this is the right way to go.
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