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 who you’re speaking to. Having experience is the best defense, but if that isn’t an option there is a template I like to follow and have honed. That said, over the years I’ve found there to be some ground truths when entering into negotiations, regardless if 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: (1) the ‘negotiator’ who does the talking; (2) the ‘Don’ who ensures everything is considered and makes sure the negotiator does not become emotionally involved; and (3) the ‘decision-maker’ who has the final voice. The decision-maker shouldn’t listen in on the conversations as it has an ability to 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 look like. 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:
- Sell company for $150m
- Retain all employees for 2 years post-sale
- Retain CEO + 1 open board seat for yourself and someone of your choosing
- Allow 2 of your 3 products to continue post-sale for two years
- No metric milestones once a contract has been signed
- Have a Letter of Intent in hand within two months.
- Want to work for this company even after the due diligence process.
Create a timeline
Lastly, create a timeline that encompasses both your team, goal, and a date or time when the decision will be decided upon. 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 email. It can make a world of difference between in person vs. the phone.
Identify who the other party is
Oversimplifying it, there are two types of negotiators: rational and risky. Rational usually take into account the causes and effects of the outcomes; risky led themselves to be driven more by their feelings. Also, identify what would be necessary for the other party (if anything): would this be nice to have, necessary in the next few years, or 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
Putting this into practice, lets 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 a 2-3 possible investors who’d lead your round, you want to start negotiating and identify terms with your primary lead you want the 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.