Everyone has a different style when negotiating – and all of these styles lend themselves to have better outcomes depending on the topic at hand and the counterparty. Having experience is the best defense, but I like to follow and have honed a template if that isn’t an option. That said, over the years, I’ve found there to be some ground truths when entering into negotiations, regardless of whether it had been principal-to-principal or team-to-team scenarios.
Create Your Team
If this is team-to-team, three types of roles should exist:
- The ‘negotiator’ does the talking.
- The ‘Don’ ensures everything is considered and that the negotiator does not become emotionally involved.
- The ‘decision-maker’ has the final voice.
The decision-maker shouldn’t listen to the conversations as it can cloud their judgment or insight.
If this is principal-to-principal, the first step is to try and elicit someone else besides yourself (if it’s practical) as a sounding board. You’ll be doing all roles yourself still, wearing the different hats, but there is strength in the enlistment of a third party (your childhood friend, an ex-colleague, etc.).
Create Your Goal
If a price, jot down your ‘walkaway’ and ‘dream’ outcomes – essentially the floor and ceiling. If it’s something else, jot down your negotiation space and its parameters. Additionally, what the end-state would be. Take into consideration if you will be talking to these people following, working with them, the length of a relationship or future possibilities, etc.
For example, if you’re selling your company:
1) Sell company for $150m
2) Retain all employees for two years post-sale
3) Retain CEO + 1 open board seat for yourself and someone of your choosing
4) Allow two of your three products to continue post-sale for two years
5) No metric milestones once a contract is signed
6) Have a Letter of Intent in hand within two months.
7) Want to work for this company even after the due diligence.
Create A Timeline
Lastly, create a timeline that encompasses your team, goal, and a date or time to work against. This part is usually fluid and depends on the amount of leverage afforded.
Understand The Medium of Communications
Understand if most conversations will be over the phone, on video conference, in person, or only by email. It can make a world of difference between in-person vs. the phone.
Identify The Other Party
There are two types of negotiators: rational and risky. Rationales usually consider the causes and effects of the outcomes; risky leads them to be driven more by their feelings. Identify what is necessary for the other party (if anything):
- Would this be nice to have?
- Necessary in the next few years?
- Is this the equivalent of an epi-pen and their existence?
|Type of negotiator(s)||Outcome|
|Rational + Rational||Good outcome|
|Rational + Risky||Bad outcome|
|Risky + Risky||Good outcome|
- Never negotiate unless you have a goal
- Never ask “why”
- Don’t act as if someone is right or wrong
- If you ask a direct question, allow them to answer, no matter the white space (silence)
- Never negotiate with yourself – only with the other person(s) or company
- If you win, don’t act like it
- If you walk away, never burn a bridge – always leave the door open
- Understand that in hard negotiations, no one wins all
- Educate yourself in negotiation skills before you need them:
- Read books
- Attend a seminar
- Take a b-school class
- Do a mock negotiation with a colleague, friend or partner
An Example – Founder Focused
Practice: let us pretend you’re a founder of a seed-stage company in the productivity software space and looking to raise a Series A. After you’ve networked and identified 2-3 possible investors who’d lead your round, you want to start negotiating and identify terms with the primary lead you like most.
What you do know is that you’ll need $6m for the next 18-20 months of development and sales to reach Series B KPIs. You’ll need to now get into the deals of your term sheet. Some of the topics you’ll cover are the following:
- No-shop agreement
- Co-sale agreements (& restrictions on sales)
- Voting rights
- Option pools
- Information rights
- Liquidation preference
- Participating vs. non participating (capped or un-capped)
- Create your team (yourself the founder, perhaps your co-founder, and an advisor you know and trust). Then assign the roles – albeit loosely.
- Create your goal that would constitute success
- $6m for 25% of your company,
- Non-participating with 1x liquidation preference,
- No ROFR, but will have pro-rata / pay-to-play
- bi-annual & annual information rights with annual operating plan
- Board construction of 5 of 2 internal, 1 independent and 2 from this round
- Cap on legal fees of $30k
- Then understand all else is gravy
- Create a timeline of 3 weeks to have it closed
- Choose your medium of comms
- Given covid, will video conference suffice or do you want to meet f2f at least once beforehand?
- Keep your options open and enter into your negotiation knowing you can walk away.