Entrepreneur turned VC

Negotiations. We all think we’re good at them. Most people aren’t that good.

For many the idea of negotiations is “let’s split the difference 50/50.” In some situations this is the right answer. In many cases it’s not.

I learned many of my negotiation techniques through experience. But I did read a couple of books on the topic that were useful:

1. You Can Negotiation Anything (by Herb Cohen)
2. Getting to Yes

I enjoyed both. And negotiation technique is one of the few areas on my MBA that was truly new information to me by the time I had attended. I learned concepts such as BATNA (Best alternative to a negotiated agreement, which every MBA will remember). We like to short-hand it, as in, “What’s our BATNA?”

As a VC I’m required to negotiate constantly.

• submitting term sheets
• doing pre-emptive follow-on rounds
• agreeing whether or not to top up a founder’s equity
• agreeing annual compensation packages
• negotiating with other VCs over who gets to invest how much
• and so on

As a result I’ve really resisted writing about negotiations. I don’t want everybody with whom I’m currently negotiating thinking, “Ah, you’re just employing technique XYZ.” Each situation is different. Sometimes my, “this is my best & final offer” really is just that. Other times I say it more subtly and have some small negotiating room. Sometimes I even say, “I will change price / terms if I need to. I prefer not to. But I really want to work together so if it’s important to you, let’s discuss things.”

But negotiations are so important that I thought I ought to included a few posts on the topic. This is the first.

I’ll do my second, “Everybody Wants Their Pound of Flesh” soon after. If I forget to write, “Don’t Negotiation Piecemeal” after that then remind me.

The first post is for situations in which you are the BUYER.

The End of the Mexican Road

When I was in college I found myself in Mexico often enough. It was a unique experience for me at that age. No, I’m not talking about the times I was in Tiajuana too late at night. But the times where we took weekend trips further in Baja California or Spring Break week-long trips to Mazatlan.

This was my first real experience with haggling. You walk up to a guy selling you a Mexican blanket (or other trinket you don’t really need) and he says:

Vendor: My friend. You buy my blanket. Only $20
Me: $20? That’s a case of beer! And I’d still have change left! (it was the late 80′s after all) You gotta be kidding!

Vendor: OK, my friend. For you. Today only. $18.
Me: No, thanks.

Vendor: OK. How much you pay? This a high quality blanket, amigo.
Me: (egged on by my friends): 2 dollars. I’ll buy a blanket for $2.

Vendor: Ay. Come on. This is high quality, my friend. I give it to you for $16.
Me: $10. That’s my final offer.

Vendor: No, my friend. It costs me more than that.

And so I started walking away. I didn’t really want or need the blanket. We were in a bazaar – somehow you get frenzied into buying shit.

As I walked down the road the vendor chased me. He had a look of desperation on his face, “My friend, my friend. Please. Ok. You can buy this blanket for $12. I make no money. But for you? 12 dollars.”

I take out my wallet. We’re both happy. I think I got a good deal. He knows he did.

And so I learned an important negotiation lesson in college. Sellers will always chase you down the road if they think you’re walking away from a deal that they want to do.

Your job is to offer a price (or terms) and walk. See if they follow you. If you get to the end of the road and turn right and they’re not following you then you know you offered a price that was too low.

But here’s the thing. As long as you negotiated in good faith and weren’t a jerk, if you turn right and don’t get followed you still have another chance. If you come back around the corner you can always start the negotiation off again. It’s not like they would say, “No, I’m sorry, sir. My offer is no longer valid.”

Imagine in my previous case if I had offered $10 and he hadn’t followed me. In that case my price was too low even for him. I could have easily come back and said, “Ok, how about $14?” or even, “Fine. I’ll buy it for $16.”

In this case I would have learned a bit about his floor. $10 was too low.

I know this all sounds obvious but trust me – in my many years of leading team members through their negotiations I know that people often struggle with finding the true floor or even seeing whether a negotiation is possible. I always busted out my metaphor, “Offer X. Walk to the end of the road. Turn right. If he doesn’t follow you we need to rethink our offer.

Another great example of where I saw this “floor testing” used was in the book, “Swim with the Sharks without Being Eaten Alive.” I read it more than 20 years ago so I can’t say for sure whether it is still relevant or not.  But it had a big impact on me in the late 80′s. The author, Harvey Mackay, talked about his strategy. He would often send other people not related to him in to negotiate a price on a certain product and do much of the haggling in advance of him. They were floor testing. That way when Harvey STARTED his process he came in a lot better informed about price & term sensitivity.

Some real world examples:

1. Executive Recruiters
I have a high degree of respect for high-quality executive recruiters. For the right jobs in your company (usually senior) and for certain types of roles they can be vital.

But their pricing strategy has always driven me bonkers. In booming markets the best firms operate on a 33% basis. They want a third of the total comp package of a senior recruit. Then many ask for 33% of this fee to be paid up front, 33% after one month and 33% after two months. I have never signed a contract on these terms.

Also, they often want to charge you 33% of total comp. So if you hire a senior sales rep with 100% bonus on top of their $150,000 base salary they want to get paid $100,000 (33% of $300,000). WTF. Why should I pay 2x the price to hire a VP of sales as I would pay to hire a VP of Market, Technology or Finance? The work is the exact same amount. And which startup would pay that kind of money anyways???

I don’t want to make this a post about negotiating with executive recruiters, but the leverage points of negotiation are:

• percentage fees (will they go to 25%? 20%? 17%?)
• fixed fees (will they agree a number so that your interests are aligned? After all, you don’t want them talking up comp because they get paid more)
• payment terms (can you make it performance based? 1/3 of fee on short-list of candidates, 1/3 on acceptance by a candidate, 1/3 first month after employee joins)
• replacement search (if candidate leaves or is fired in first X months, what happens? replacement search? part refund? what?)
• non poach (will they sign an agreement not to hire anybody from your company for 3 years? 2 years? 1 year? 5 years?)
• etc

2. Software Packages
The number of times I’ve seen software license agreements where I’ve been told by my colleague trying to purchase it that, “the fee is the fee. My rep told me.” or something similar. The fee is seldom just the fee. Especially near the end of a quarter.

• Can we get a trial period first?
• Can we pay the same amount but extra licenses at the same cost?
• Can we get a “most favored nation” contract? (where if another customer is offered a lower price, they’re legally obliged to offer it to me)
• Can we prepay a year and get a discount?
• You say only prepay a year. We want to buy monthly
• And so on

Negotiating Style

Understanding what terms or price you should pay does not mean you need to take on a power-trip mentality when you’re the buyer. For starters, you should respect the people who are going to provide you with products and services. They’re just doing their job and often their product / service is integral to what you’re trying to achieve.

Also, just because you want to get a sense of what is possible in a purchasing negotiation doesn’t mean that you need to take every last penny of profit out of the deal. For example, if you’re in a down market so you can put the squeeze on a recruiter to do a search uber cheap, you might end up being penny wise, pound foolish. If that person has three gigs on at that time and your is significantly below market and below the others you shouldn’t be surprised if you get a little less time, attention and resources than the others.

In fact, your goal in a negotiation is not always to get the lowest possible terms. Your goal is to understand the needs of your partner and create win/win outcomes where both sides are incentivized to continue to want to work hard together – now and into the future. Sometimes that means you want the absolute best deal you can get. Other times it doesn’t.

Either way, remember that you can make offers with a smile on your face that might seem absurd. And if you’re not insulting in how you offer and if you walk down the road and turn right – you might learn a little bit more about the art of what is possible.

Image courtesy of Inside Outsiders on Flickr

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