Securing Investors and Structuring the Deal 301
the business can offer—the sources of these returns, their magnitude, and their timing.
Next, entrepreneurs must understand financiers and the context in which they make
their decisions. Investors are interested not only in the amount of money they may make
but also in the risk of their investment, the timing of the returns, the controls to protect
their money, and the mechanisms needed to (1) reinvest if necessary, (2) abandon if pru-
dent, and (3) harvest when appropriate.
Perhaps most important, entrepreneurs need to understand themselves. What are
their preferences for ownership, control, wealth, and risk? Without self-knowledge, en-
trepreneurs may make deals that will not have long-term positive benefits and that can
even sow the seeds for a lifetime of discontent and bitterness.
This chapter explores the issues surrounding structuring deals and financing new ven-
tures. We review the process by which entrepreneurs approach investors and examine the
criteria investors use to make decisions. Then we build two models to illustrate the
issues of deal structure. A simple discounted cash flow example was presented in
Chapter 7, and an understanding of this basic model is necessary to understanding the
more elaborate models presented in this chapter. The chapter continues with a discus-
sion of the negotiation process. Experience and common sense provide many of the
guidelines for the “dos and don’ts” of deal negotiation. Last, we introduce some of the
basic concepts in the area of negotiation. Negotiation skills are important for the nas-
cent and practicing entrepreneur, and skilled negotiators give their firms an advantage in
resource acquisition and deployment.
APPROACHING INVESTORS
What should entrepreneurs know, in addition to the particulars of their business, when
they meet with investors? A knowledge of investing patterns and traditions is vital. The
entrepreneur-investor relationship has been modeled as a classic “prisoner’s dilemma.”
There are high rewards for mutual cooperation and big losses for mutual deception. But
neither party wants to be played for a sucker and there are short-term rewards for cheat-
ing the other party. In the long run, the best strategy is cooperation among all the par-
ties to the deal.^3 A process that promotes social interaction among the participants will
produce trust, feedback, and timely information. The goal is a relationship based on fair-
ness and procedural justice.^4
This concern for investor relations helps to mitigate some of the initial skepticism
because at the most basic level, obtaining financing is a selling job. The entrepreneur is
selling a part ownership of the new venture (equity), a percentage of the anticipated cash
flow (debt), or both. Every selling job requires knowledge of the customers, their pur-
chasing habits, their sensitivity to price, and the substitutes and alternatives available to
them. In Chapter 3 we discussed selling products. A review of the concepts of “buyer
power” can be applied to financiers and will provide some of the insight needed to plan
an effective strategy.
The Ideal Investor
Every entrepreneur has his or her vision of a dream investor, but the ideal seldom exists
in real life. What are the characteristics of the ideal investor? The ideal investor:
