When To Say NO To An Investor

Alexandra Anghel offers advice on when it's the right decision to say no to an investor.

We have all heard the horror stories about how difficult it is to raise money, especially in Europe.

Investors are used to saying no a lot and most of the time they have a valid reason for doing so. Not the right market, not the right product, not the right team.  

So what do you do when you (finally!) get one of them to say yes? Do you analyze if they are the right match for your startup or if you have good chemistry? And when you get your hands on one of those coveted term sheets and it’s not exactly what you expected, do you consider saying NO to them?

Our story

In December 2013, we had the amazing opportunity to be selected for the Wayra Munich accelerator and the LAUNCHub seed investment fund at the same time.

This came after a difficult and busy year. After participating in various contests like the Mobile Premiere Awards in Barcelona and Mobilio in Bucharest, in June 2013 we applied to the Wayra Dublin academy and managed to be shortlisted in the first 20 startups. We were on an ascending path and I was already imagining myself moving to Dublin for the next 9 months, so it was a huge blow when we didn't get in.

Looking back on it now, it was obvious that the competition was fierce and we did make a few small mistakes while pitching which probably cost us the spot, but then it felt like the world was coming to an end. A month passed by before I recovered morale.

After that, we were invited to pitch at the Wayra Munich academy that still had unoccupied spots and got selected on November 22nd.

During the time we were preparing for our second Wayra pitch, we were also approached by LAUNCHub and met with them for the first time at the How To Web conference in Bucharest. Immediately after returning from Munich, we drove to Sofia for their Long Weekend event and received a positive answer from them in the following week.

All of a sudden, we were in the position of having one investor and one accelerator come in at the same time.

Wrapping up the investment

Unfortunately, not all that glitters is gold. It is difficult enough to negotiate a single term sheet, so how about two? There was a lot to take in over a short period of time, especially since I have a technical background and I prefer programming to negotiating contracts. Our CEO did a tremendous job and managed to keep things together during negotiations. Even though we tried to go forward with both Wayra and LAUNCHub, in the end it wasn't possible and we decided to sign with LAUNCHub.

How do you know a deal is (not) right for you?

From this whole process, the most important thing we have learned is that we, as co-founders, have to act in our startup's interest.

It's not a question of being greedy and saving as much equity as you can for yourself, it's a matter of positioning yourself in a long-term relationship with an investor. So, if you receive some bad signals, don't ignore them. Here are a few things that should put you in battle mode:

1.       When they ask for too much

Too much is most of the time “too much equity”. I have personally met founders that at some point started a company and gave up control on the seed round. It’s true that this happened quite some time ago and it’s rarely seen today. However, you should keep in mind that a following round will dilute you a further 20-30% and even if you keep more than half of the shares now, you might lose the pole position next time.

Also, stay away from so called investors that ask too much from the founders.

If you decide not to take a salary or work 70 hours per week or spend your weekends discussing strategies instead of going to the beach, it should be entirely your decision, not something you do in order to gain their approval.

2.       When they refuse to negotiate the unreasonable terms

What does “unreasonable” means? Well, to put it simply, they are those very aggressive terms that are not commonly used by other investors and are built just to protect them, without any consideration for the future of your startup. For example, having a discounted valuation, a very aggressive anti-dilution clause or any other that discourages other investors from getting on board can be seen as unreasonable. You should sign that kind of contract only if you don’t have another way out.

Even if you think it’s a good deal, always try to negotiate the term sheet, especially the valuation.

The worst image you can project is that you will settle with whatever they give you or that you don’t care enough about the deal.

Also, if you don’t place yourself on a strong position now, it will be a whole lot harder to negotiate anything after the deal is signed.

3.       When you have a better alternative

In some very rare cases, you might have two investors interested at the same time. The ideal situation would be to do a co-investment and sign them both, thus having not only more money, but also access to their networks. Also, with extra options, you have more leverage on negotiations, so make sure to ask for more equity.

Sometimes a better alternative can mean your own funds. If you’re one of those fortunate cases where the startup makes enough revenue to sustain itself, do not settle for a seed round, go bigger.

4.       When they give you an ultimatum

We all know what an ultimatum looks like. Do not be confused by a polite package, in direct translation, they are saying “it’s either our way or the highway”. Most of the time, it means they do not care enough about the deal to keep the conversation going or you just pushed too hard. If it’s the second reason, it’s your job to fix it. Otherwise, you should re-evaluate whether this investor is the right choice for you.

And equally, do not give ultimatums yourself. You are not in the position to do so and even if you were, it’ll just put an end to the conversation that otherwise might lead somewhere.

5. When they spent too much time on due diligence or discussions

Closing a seed round usually takes between 3 and 6 months, so be prepared for some waiting. For us, it took about to 2 months even though we had agreed quite fast on the base terms. Most of the time was wasted on paperwork and other formalities.

However, if you feel like you're running around in circles and not making any progress, maybe it's time to reconsider the deal. You really don't want to run out of money because the investor is moving too slowly. Try to push forward as much as you can and search for alternatives if you're past your waiting limit.

I do hope this information is useful for all of you trying to close your first investment. And just keep in mind, that contract is not a destination in itself, it's just a stepping stone to your next challenge.

Alexandra Anghel  is the Co-founder and CTO of Appticles.  She has a Bachelor’s Degree in Automatics Control and Computer Science from the University of Politehnica Bucharest/Romania and over 9 years experience in server-side programming (PHP, Python, NodeJS, MySQL, MongoDB). She also works as a designer, writes articles and makes a great team leader with over 100 small & medium projects developed over time. In 2012, she was awarded with the 2nd place at Girls in Tech, Paris. 

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