1. Negotiating with a Potential
Investor
February 17, 2010

2. Overview

3. Preparing for the Investment Process and
Due Diligence Expectation

4. While the investment
process duration can
fluctuate wildly, the
order of this timeline is
fairly consistent with
most investors.
In general, you can
expect to spend
between 3 and 6 months
from the initial investor
conversation to closing.
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5. The timeline will change substantially depending on a number of things. Here are some
factors that can adjust the timing and ways you can address them.
Factors Stalling Ways to Stay on Track or Accelerate Process
Process
Investors’ own schedule • Create competition among investors
and priorities • Indicate that you may not need capital 6 months from now or valuation
expectations may be higher
Waiting on anticipated • Exceed financial projections
milestones and financial • Win new business or opportunities that were not originally in plan
expectations
Lack of access to due • Have all due diligence documents ready and well organized
diligence materials, • Be prepared to provide list of customers, vendors, past employers and
reference sources partners for reference calls
Surprises that spock • Anticipate potential hiccups over next six months and disclose to investors
investors • Better to prepare them with potential bad news than catch them off guard
Term sheet and investor • Do your own due diligence on the value of your business
document negotiations • Hire qualified counsel to help navigate terms
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6. Confidentiality Agreements (CA) / Non Disclosure Agreement (NDA)
Investment Committees, Investment Recommendation Memos
Syndicates, Lead investors
Investment models, IRR analysis
Pre Money, Post Money
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7. Will send out formal check list to call participants
Diligence area Documents/Information required
Management/ Resumes for management and board, personal references, board packets/meeting notes
Board
Market Sales pipeline, qualitative discussion of current and expected products and services,
competition matrix, sales and marketing materials, customer and supplier contracts,
customer references
Technology, IP All patents and IP review, technology development roadmaps, past or pending IP disputes
Production, Inventory,& asset lists, efficiency improvements needed/equipment upgrades required,
Operations production capacity with current facilities, quality control standards
Financials Historical IS, BS as detailed as possible in Excel format, most recent audits/tax returns,
projections for next 5 years IS, BS, CF, detailed uses of cash and future capital required,
AR, AP schedules, detailed information providing back up for cost assumptions
Employment Employment contracts/non-competes, recent payroll report, employee work and training
manual, retention data, organization charts with open positions, recruiting plans
Legal Incorporation docs, cap table with all previous round investment documents/term sheets,
bank financing documents, any other legal docs, insurance coverage
7 © 2010 SJF Advisory Services

8. Full disclosure - send everything you have; easier to supply everything than to
weed through materials
Don’t recreate the wheel – if you have already prepared a document for internal
use, your board or another investor, just share that
Face to face meetings often more efficient - Many questions are best answered
with in person meetings instead of document overload; suggest investor spend
1-2 days at your office talking through their prepared list of questions
Let them be a third wheel – copy them on internal company correspondence, let
them dial in to sales calls (when appropriate), invite to marketing events and
trade shows
Be easy to work with – Develop a good rapport with the investor from the
beginning and the process and term negotiations should be fair and transparent
8 © 2010 SJF Advisory Services

9. Finding the right investor
The investor who offers the most money or the investor who takes the least
amount of ownership interest is not always the best fit.
Things to ask:
 Does the investor have experience in your industry?
 What value added experience would the investor bring to your organization?
 What is the investor’s time horizon before exit?
 Does the investor have the capacity to infuse additional capital as needed?
 How does the investor plan to interact with the business
Things to consider:
 Research background, check reference, etc.
• Talk to business owners who worked with the investor in both successful and
unsuccessful businesses
• Talk to investors who have invested in deals alongside the investor
• Evaluate core competencies
• Past history/track record
• Background check on key principals of firm
• Airplane test
 Listen to questions investor asks
 Conduct a clear conversation about personnel requirements
 Negotiate without emotion
The ideal investor:
Shares your vision to grow the business
Brings more to the table than money
• Copyright © 2010 ICIC – 1

10. Negotiating with a Potential
Investor