February 15, 2007

First-time Entrepreneurs Need to Bow Down

I spoke with a first-time entrepreneur that I really liked today. He was passionate about his idea, he had made some serious sacrifices for his cause and he worked like a fool.

I feel terrible for the guy because I don't know if he is ever going to successfully raise money. He's been offered the amount that he's looking for on several occasions by more than one investor. But the dude is so set on raising money on his terms that he won't accept any others. His greed is going to kill the deal.

In most cases I believe that the best thing that a first-time entrepreneur can do when raising capital is bow down to most, if not all, of the terms that their investor lays out for him/her.

(Their are obvious exceptions to this rule; the most obvious being when you have multiple investors banging down your door to give you money. Or, if the terms of the agreement will hamstring your company's ability to make money. Ninety-nine point nine percent of entrepreneurs aren't lucky enough to be in the first situation, and the second scenario is pretty easy to spot.)

Greg Warnock wrote a great article for Launch Magazine (page 10) about his first investor and how his relationship with him has benefited his career. One of the reasons (not mentioned in the article) Warnock enjoyed such a lasting and mutually beneficial relationship with Jurgen Manchot is because Warnock basically let him have his way in his first negotiation with him. Of course, anyone who has negotiated with Greg Warnock knows that he would probably advise entrepreneurs to bow down to his every whim, but I'm sure you get the point nonetheless.

Losing a bit of equity on your first deal is not the end of the world. Your company not reaching its potential because of a few shares is. Give up a little on the first deal and reap the rewards in the future. The next time you raise money you'll come to the negotiating table with the strength of a successful track record, a solid relationship with an angel and the respect of that angel's network.

Unrelated note: Fred Wilson gives investors a little advice on being good negotiators here.