Securing Investors and Structuring the Deal 319
of whatever is best for the business. Bad advice abounds in these situations. Some of it
arises from ignorance, but much from self-interest. Although the entrepreneur is prob-
ably new to this game, the lawyers, brokers, and investors are not. Caution is advised.
The value-added venture capitalist will often help the venture with advice, networking,
and management. Street Story 8.2 offers some examples.
The entrepreneur also needs to guard against his or her own greed. If he or she offers
to give up too little—too little equity, too little control, too little authority—investors
will walk away. However, the entrepreneur must also guard against the appearance of
giving up too much. This appears as either naiveté or lack of commitment to the new
venture.
Last, the entrepreneur should prepare for the reality that the need for future financing
is always a possibility. The initial and early deals should not foreclose on this need.
Incentives for the current investors to invest more should be built into each contract.
Incentives for others to invest and not be crowded out or preempted by the initial
investors should also remain. Everyone involved in the deal should have some latitude in
making decisions and the ability to exit after a reasonable time with their integrity intact
(and maybe some money, too). Managing investor relations therefore is a critical task.
Consider the problems facing Joe Strazza, founder of New York based WinMill
Software. When he started the company, he sold some equity for initial financing. He
raised another $3 million over the next few years, mostly by selling over 100 limited
partnerships to family, friends, and fools. This reduced his ownership from 40 percent
to 20 percent. When the business was soaring, investors were pleased to receive divi-
dends. If the company were sold, they would reap the capital gains. But when tech
tanked in 2000, the investors turned into critics. There were no dividends and they
couldn’t sell their stock. The board refused permission for buybacks because the compa-
ny did not have the cash. Investors wanted to become involved in company decision
making, and at least one investor gave Mr. Strazza a forty-five minute screaming piece
of his mind over the phone. Strazza concludes, “People say they believe in you and like
you. But when you’re down, you learn it was all about the money. That’s a tough lesson
to learn as an entrepreneur. You feel like you’re losing your friends.”^29
NEGOTIATION SKILLS
Negotiations in many different forms are all around us.^30 Labor organizations negotiate
with management, defendants negotiate with prosecutors, and countries negotiate their
national interests on the world stage. In business, suppliers negotiate with customers,
creditors with debtors, landlords with tenants, management leaders with their subordi-
nates, and entrepreneurs negotiate with sources of financial resources.
A business negotiationcan be defined as a process in which two or more parties
exchange goods and services and attempt to agree upon an exchange rate for them.^31 The
process usually includes more than the negotiator and opponent, because constituents
of both the negotiator and opponent are often represented too. In other words, in nego-
tiations entrepreneurs represent not only themselves but also the firm and its managers,
employees, and stakeholders. The opponent in the negotiations is also likely to have con-
stituents with an economic interest in the outcome of the negotiation. In addition, it is
