When you're negotiating a valuation it's important not to get too hung up on decimal points. As angel investors, we're all looking for that one company that will go global and deliver 100x or more. So if the valuation is $1 million or $1.2 million it isn't really going to affect your returns.

Kylie Frazer

Entrepreneurs need to have enough skin in the game

Entrepreneurs need capital over the life of their business and that involves taking capital in a number of sequential rounds. Each time they take a round they’re giving up a part of their company but if they dilute too quickly they're not going to be incentivised to continue.

When crafting a deal you want to make sure that entrepreneurs can get more capital at every stage and still feel like they’ve got skin in the game. So I put a lot of my energy into balancing the right valuation with the right cap table structure for future growth. I want to know that by the time the entrepreneurs have got all the capital they need to exit they will be rewarded – this incentivises them throughout the process.

Generally at exit you want the founders to have at least around 30% so work backwards from there. At the angel or seed stage, investors shouldn’t take more than 30% (not just for cap table reasons, but also for the practicality of maintaining ESIC eligibility). Another couple of rounds may take up another 30% to 40% - although it's hard to assess how much equity they're going to need to give away in those series A and B rounds. You also don't know exactly when revenue will kick in, how much growth they're going to need to pay for and how much will happen organically.

This means thinking about capital requirements for the entire journey. But not all entrepreneurs are aware of their capital requirements upfront. The good ones can tell you where they want to be in 10 years time and how they're going to take over the world - that's when it gets really exciting.

When crafting a deal you want to make sure that entrepreneurs can get more capital at every stage and still feel like they’ve got skin in the game. So I put a lot of my energy into balancing the right valuation with the right cap table structure for future growth.

Aggressive negotiations don’t build relationships

Having an aggressive negotiation upfront is not a great way to start a 10 year relationship. It doesn’t tell the entrepreneur that you've bought into their vision and are committed to the journey. I like valuing companies to the nearest million because it helps preserve the integrity of your relationship with the entrepreneur.

Generally I don't see the point in haggling over $200k or $300k in valuation. At an early stage valuations are more of an art than a science and you don't want to destroy an entrepreneur with a bad valuation or a bad valuation negotiation experience.

As an angel, you've got to be comfortable with the binary nature of early stage investing – you are looking for that one that will return multiples of your money and you're going to take some losses along the way. That’s why there’s no point sweating the small stuff – negotiate for the long-term for both yourself and the entrepreneur.

Kylie Frazer is an Angel Investor.

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