Negotiation strategy
Negotiation should be viewed as the beginning of a long-term relationship rather than a one-off transaction. The terms agreed will shape how strategic decisions are made and risks shared.
Key tips
- Approach negotiation as the start of a long-term partnership
- Focus on alignment, not just valuation
- Understand all key terms, not just headline valuation and amount
- Consider how terms will operate in downside scenarios
- Be cautious of excessive dilution or loss of control
- Avoid terms that make future capital raising challenging
- Seek legal, financial and strategic advice
- Consider governance rights — board seats, observer roles, and advisory positions — alongside the economics. These are part of the deal and are best raised before formal drafting begins.
- Know your "must haves" and "must nots". Be prepared to walk away.
- Ensure final terms support your mission and long-term sustainability
Warning signs to watch for
- Investors seeking excessive control
- Pressure to accept terms quickly
- Unrealistic growth expectations
- Significant dilution of founders' ownership at an early stage
- Not enough runway to reach the next milestone or capital raise
- Complex or unusual deal structures
Remember: founders may feel pressure to accept terms to secure funding, especially when capital is limited. However, agreeing to unfavourable terms can create challenges for future growth. Stay disciplined and ensure investment terms are sustainable.
Use the Term Sheet to lock in what matters
The Term Sheet stage is the point in the process where you typically have the greatest negotiating leverage. Once formal drafting begins, documents are typically prepared on the investor's or lender's standard forms — and novel asks become significantly harder to land.
If something matters to you commercially, raise it before drafting starts and get it recorded in the Term Sheet. Don't assume you can sort it out in the docs later: you risk being handed the other side's standard position with much less room to push back.
Understanding valuation
Valuation is not just a technical calculation — it is a strategic decision that determines how much ownership you give up and shapes your relationship with investors for years to come. The type of capital you raise affects how and when dilution is calculated: a priced equity round fixes dilution at the outset, while instruments such as SAFE notes and convertible notes defer it to a future event that may produce a different outcome than you expected. Before entering negotiations, determine what level of dilution you are prepared to accept and use that as your anchor.
Pre-money vs post-money
Pre-money valuation is the value before new investment. Post-money valuation is the value after receiving funds. The investor's ownership percentage is calculated from the post-money valuation. Understanding this distinction is critical as it directly affects dilution.
How investors value enterprises
Valuation is not an exact science and is typically negotiated. Investors consider business stage, growth potential, market opportunity, traction, team strength, comparable transactions, and, for social enterprises, impact alignment.
Worked example
Pre-money valuation: $4,000,000
New investment funding: $1,000,000
Post-money valuation: $4m + $1m = $5,000,000
New investor ownership = $1m ÷ $5m = 20%