Chapter 6 - Negotiating the Deal
IN THIS LESSON
Positive Negotiation Tactics
Because your relationship with an investor is intended for the long term, we recommend that you use negotiating tactics that result in win-win situations.
A win-win negotiation looks at both your position and interests and at the investor’s position and interests. The objective of a negotiation with positive tactics is to determine a mutually acceptable outcome. When both you and the investor walk away relatively satisfied with the deal that you worked out, then it is an example of a positive, win-win negotiation.
Many traditional negotiating textbooks teach that a good starting point for a negotiation is to start with a strong negotiating position, such as making strong demands and coming across as inflexible; you want to see who will blink first. While establishing a strong position is still beneficial, if you are too inflexible and seen as stubborn or too one-sided, the negotiation can break down and/or be engulfed in conflict. A more effective way is possible.
No Need for Zero Sum or Scorched Earth: Clear “Winners” and Clear “Losers”
Negotiating with VCs should not be done with a zero-sum gain or scorched earth mindset. There doesn’t have to be a loser in the process. Because investors become partners, it is in your best interest to avoid alienating them. You obviously want to maintain the relationship.
Negotiating may not come natural to you. Or you simply feel uncomfortable talking to investors who may see things differently than you see them. Or, on the other hand, you may fancy yourself a tough, no-nonsense negotiator, who tends to “win” negotiations while others clearly lose. Both extremes have downsides, but one of the ways you can supersede your own natural inclinations is to use a “principled negotiation” approach.
“Getting to Yes”
The authors of a classic negotiation book called “Getting to Yes” identified the five steps of principled negotiations:
1. Focus on the issue at hand
The following are key components of this step:
Put yourself in the shoes of the VC.
Remain calm during negotiations, as this will support clear thinking for decision-making.
Try to understand the VC’s underlying interests, needs, goals and concerns.
Communicate clearly and concisely.
Use active listening techniques.
2. Focus on interests, not positions
The following are key components of this step:
Try to avoid attributing blame.
Maintain a polite tone.
A VC is more likely to be willing to negotiate if he feels that his side has been fully heard.
Look for a common interest.
3. Develop options for mutual gain
The following are key components of this step:
Use the negotiating process to explore different options.
Brainstorm new solutions to a problem
Be open to all ideas but only develop the most promising options.
Look at the situation from a new perspective.
4. Use objective criteria
The following are key components of this step:
Attempt to agree on a framework that would be used to structure your conversations with a VC.
Bring in independent data and measurement information, such as market value.
Look at yourself honestly to see if your subjective opinions are supported by objective information.
5. Know your best alternative to a negotiated agreement
The following are key components of this step:
Think ahead about the different options if you cannot reach an agreement with a VC. For example, the time you spent negotiating with the VC may turn into a different outcome, such as the VC recommends you to a different VC. It would not be the agreement you aimed for, but it would be considered a “best alternative.”
The bottom line is to build long-term relationships, you need to work collaboratively with the VC and construct agreements that benefit both sides. Ask questions and listen carefully. Positive negotiation relationships create a vital thing that is needed for you to form an agreement with a VC to finance and grow your business – trust.