Don’t Cede Control: Why You Need to Cut out Middle Men in Negotiations

Posted on Jul 19, 2011 | 63 comments


Middle Men. Middle People?

They exist in all forms of work and life. They’re essential in helping us get our jobs done because they specialize in something we do not. They do a routine task over-and-over again all year long that we do only periodically.

Lawyers. Recruiters. Bankers. Real Estate professionals. PR firms. You name it. And yes, VC’s, too.

We need them all. Yet a critical mistake I see many entrepreneurs make is that they hand over too much control to their third-parties. They outsource the critical negotiations and “trust their advisors to handle the details.” Middle Men need to be led by you, not the other way around. And a key point is that when it comes down to “negotiations” you need to turn up your personal heat and dial back the middle man.

Let me start with an example. I was recently dealing with a real estate agent on a transaction. We had the final terms of our agreement fairly well boxed in within a range of about 5-7% on price and within 30 days on move-in date. I obviously preferred the lowest price and I wanted the latest move-in date. I told my agent. She told me, “start with the price you want but the move in date he wants.”

“That’s nuts!” I said. “Why would I do that?”

“Because he told me that he wants the move in date to be X.” She then told me that she did this for a living and she knew how to negotiate. Um, excuse me. I negotiate for a living as well. And the thing is, to her this minor “give” is no big deal. To me it’s a lot of money. I don’t doubt her integrity, I just think we value the outcome differently.

I said, “If I start with your position I have nowhere to go but down. What if he accepts the date and then asks me to compromise on price? I’d rather start where I want to end up and then judge if I want to compromise based on what he comes back with.”

She way annoyed.

If you’ve never read Freakonomics you need to. One thing I learned from the book is that real estate agents always sell their personal property at higher relative prices than their clients’ properties. They hold out. They wait for a better offer. They’re not in a rush. When they rep you, the marginal cost of them trying to get you a slightly better deal is high for them relative to settling and moving on.

I think for most of us this is intuitive.

I started with a personal example because I’d like you to have that mindset as we discuss the business people in your lives. Remember: they’re not bad people, they just don’t have the same interests as you do in the outcomes. They’re balancing many clients. Small compromises are nothing to them. It’s progress.

On the property in question, I had to wait an extra 4 weeks where I might have lost the place. I was willing to wait or move on. In the end I got my exact price and my exact move in date. It just took more time & more risk of losing the deal and waiting for the next one. I was willing. My agent – not so much.

1. Recruiters:
I have always had close relationships with executive recruitment firms. I value the service they provide. On balance I usually prefer to recruit people from my network both in terms of saving costs as well as hiring people I know & trust. That said, there are times where you need to cast a wider net. Here’s what you need to know:

Executive recruiters are great at sourcing candidates. They have a wide set of existing relationships, they have teams of junior staff that cull databases (or increasing pile through LinkedIn), they are skilled in approaching prospective talent and they can “pre sell” your company to get the recruit to the table in the first place. This is the skilled bit that you can’t effectively manage.

They’re also good at screening candidates. At least the great recruitment firms are. They know what is “market” for your recruits in terms of base, bonus & stock options.

So you finally get down to your short list of final 2 candidates. Or maybe even your final one. Often recruiters want to handle the final negotiations on package and/or do the reference calls. I say NFW.

First, I want to be the person looking my final candidate in the eyes and telling them what the offer is. I want to judge their reaction in person and be able to react on the fly. I know where my pressure points are – where I’m willing to give in and where I prefer not to. I want to judge whether they’re really committed to my company or not.

You can’t outsource this to a recruiter. They’ll tell you that it’s easier for them because the candidate will talk more openly with them. They’ve done this 1,000 times. Yeah, that’s what my real estate agent told me, too. You’re the guy. Have the discussion yourself. Trust your “Blink” instincts.

I’m also reluctant to hand over reference calling. I know that no recruiter will agree with me on this point, but I’ll tell you that I’m certain there’s a positive bias in reference calls. They’re on the final candidate. They want to close down the search. They want to place this person. They’re not going to ignore negative feedback, I’m not questioning their ethics. But I doubt they’ll dig in as deep as you will in the reference checks. I doubt they’d be willing to press harder in questioning and/or be more attuned to negative signals that the reference might be implying but not actually saying.

One tip – depending on seniority – you can sometimes hire independent reference check firms. It can get expensive so you’d probably only do it for a very senior hire. But I’ve found it to be invaluable. They ask really tough questions that I have a harder time asking. The reason it’s harder for me is that I know whatever I ask is going to get back to my candidate. Unfortunately that’s how reference checking works.

With an independent person they ask anything they want I can apologize on their behalf. Trust me, you learn a lot more that way. VCs often do this for reference checking.

2. Lawyers:
So you got your big term sheet signed and you’re now in the drafting. You thought it was going to be as easy as just having the term sheet transferred to a longer form document. But as it goes to the legal docs naturally 20 issues arise the require negotiations. You want the deal to close in 4 weeks. But every freakin’ week there are delays in getting the lawyers to “turn around” the documents.

Their lawyers blame yours. Your lawyers blame theirs. This seems to happen on every deal I ever work on.

Here’s the reality. Sometimes the problem is that one of the sets of lawyers has too many deals on the table and just doesn’t process your documents quickly enough. Trust me, that happens. Other times it’s a matter of the other lawyers waiting for feedback from their client who hasn’t had time to process the issues. So much freakin’ time gets lost in the back-and-forth.

And then there’s the madness. Lawyers insist on arguing with each other like sports. They have their “lawyer points” that they really care about and believe you should be passionate about as well. It’s their job. I call it “arguing over semi colons and periods (full stops to you Brits).”

Do you want to get the deal done faster? There’s one way – even though everybody is going to try and resist. Get everybody in the same room for a multi-hour “drafting session.” By everybody I mean your lawyers, theirs and the VCs or whoever the client is (maybe a company acquiring you). That’s the only way to work through all of the issues in a timely manner.

Why do they not want to commit to being together? I’m guessing it’s less efficient for them. They have to suck up all those hours for just one client and in a large block. If they do it asynchronously they can deal with it when they have time to get around to it – often late in the evening. If for some reason your deal fall through – remember that “Time is the Enemy of All Deals” – it’s not the end of the world to them. It might be to you. Your incentives for speed aren’t aligned.

In the same room, when “lawyerly” issues crop up you and the counter-party can take commercial judgments on where you want to compromise. In the same room, clients can’t “hide behind their lawyers” by saying “it wasn’t me asking for that.” You problem solve. Everybody is in the room to hear the issues.

Shit gets done.

Don’t let lawyers toss the ball back-and-forth. Cut out the middle man. Negotiate directly with your VC or acquirer with lawyers present in the room.

3. VCs:
VCs are often on your side and usually act in an ethical manner. Same as other middle men. But when hard stuff comes up at your company you want to be the principal in the negotiations. If you’re raising your B round, you’ll likely get huge benefit from your A round investor helping with introductions. But when it comes time to negotiating the term sheets or determining which investor group to accept – you want to be the principal in that negotiation. No “back room deal.”

When you want to sell your company one day – the same rule applies. You can sometimes leverage your VC in a “bad cop” negotiation with a buyer. You can certainly get coaching from your VC on how to play the negotiations since they do it more often than you do. I’m not saying to not trust your VC (in the same way I’m not saying don’t trust your recruiter or real estate broker). But you want to be the person negotiating your deal.

What might the VC do against your interest? For one, due to the way liquidation preference work sometimes they have “flat spots” which means that they might earn the exact same amount from a $40 million sale as they would from a $50 million sale. They might make this clear to the buyer.

The opposite might be true. You might be willing to sell for $40 million but your VC might be telling them $50 million or nothing. It happens.

As a VC I don’t necessarily want to cede 100% of the control to you, either. I have investment money at stake so I’m a principal in the negotiation, too.

Why do I care? Because many buyers try to skew deals so that they pay more in future incentives to employees than in purchase price for the company in order to reduce the return to investors and maximize the management lock in. I understand that thinking. But my duty is to maximize returns for my shareholders.

We’re both principals in a sale. If you trust your VC then hopefully they’ll help represent your interests and be transparent with you about what the key issues are and when your incentives aren’t aligned. I’m pretty explicit with my portfolio companies because I’ve been burned on the other side of the table. But just remember, you’re your own principal. Don’t cede complete control to your VC because “they’re the expert” or “they have a long-standing relationship with the buyer.”

4. Bankers & PR:
I think you get the point so I’ll make the last two brief. Bankers & PR firms have multiple clients. They also have to deal with the buyer or the journalists on a regular basis for a long time. So they’re less likely to push things to the line as you would be. It’s back to incentives like real estate agents in Freakonomics. They want you to succeed. But they play a multi company, multi-year strategy.

So they’ll think more about their long-term relationship with the corp dev team at the buyer than you might. They’ll think about what other deals they’re shopping them and balance all of their clients interests. So while you definitely want their help in discussing price and getting you more information (they’re better at it than you), I want a seat at the table. As an entrepreneur I have one company to sell. And possibly just one time. For them, this is just a deal.

PR firms are the same. Highly ethical. Very customer focused. But when they’re trying to get David Pogue, Walt Mossberg or Kara Swisher to write a story for you, they’re also thinking about their other clients – now and in the future. The good side is that because they have many clients over a long period of time they can get you far more access to the journalists than you could get. Same with bankers and corp dev groups.

But when it comes time for my story, I want to pitch it. I want to decide what the right “angle” on the story it (with their input, of course). I want to decide if I give an exclusive or not. I want to control my outcomes.

Summary:
In dealing with middle men you get the huge expertise they bring to bear by doing their task on a repeated basis and dealing with the same sets of end customers. I not only encourage this, but I’ve spent my career fostering these important relationships.

At critical moments in negotiations your interests diverge in ways that even your service provider doesn’t realize and probably doesn’t acknowledge to themselves. What real estate agent do you know who actually thinks he or she sells you short? The data says otherwise.

You have an interest in pursuing the absolute best outcome you can get. Often others have an interest in pursuing the best possible outcome they can get, without sinking in extra time, without risking ruffling feathers and without breaking conventions & norms.

Chart your own path.

  • http://jeffmcneill.com/blog/ Jeff McNeill

    Excellent. This is a good counter-weight to well-developed win-win negotiation advice.

  • http://jeffmcneill.com/blog/ Jeff McNeill

    Lawyers always say that.

  • http://edge4.blogspot.com Chris Hamoen

    Regarding Freakonomics – that was the point I remembered most (Real Estate agents).

  • Adam Day

    So much time wasted. good advice. If each side would focus on the win win and a good clean deal instead of getting one over on the other side they would be farther ahead. Once you get it done your on the same team. You only have one reputation. Dont mess with it.

  • Terry

    Thanks for the great advice

  • http://twitter.com/robbakshi Rob Bakshi

    Mark, could you write a primer on the problems our economy is facing today for those who are not much economic savvy and perhaps if you could describe the most common government/economic terminology they use in economy section of the NYT newspaper

  • http://twitter.com/AndySack Andy Sack

    Loved reading this piece, very insightful!

  • http://www.boris-photography.com Boris Henriot

    Thanks for this feedback Mark. It might seem obvious but I’ll rethink about it when I believe a middle man is more able to decide on a strategy than me.

  • http://twitter.com/TheCliveRich Clive Rich

    It can be a useful source of bargaining power to use experts on your side in a negotiation. Clearly they are there for their expertise, not to make decisions for you but I would query whether it is always best to take them out of the negotiation at critical points.

    It is true that often we as the decision-maker will have more at stake than the expert does. It is also true that for that same reason we might handle the negotiation differently than they would. However, their detachment can actually be an advantage. Often when our personal interests are at stake we invest the deal-making process with too much emotion. This can cause us to get anxious or aggressive or inhibit us from making decisions. As a result we might end up over playing or under playing our hand.

    When we use experts their lack of emotional involvement can be an advantage. It can cause them to view matters more calmly and dispassionately in the heat of the negotiation, enabling us to make better decisions when they refer matters to us for instruction.

  • Justin Ray

    Good article, but I think you have it completely flipped on the lawyers.  The reason they don’t want to have an all parties drafting session is that is will be TOO efficient.  Law firms make money by volume of manhours and that is really the only way.  The back and forth and continual document prep by junior associates is where they make their dough.  Getting everyone in a room where issues get solved in a matter of hours turns off the tap.

  • http://stonebusinesslaw.com Ethan Stone

    Great post.  With respect to lawyers, I’d say there’s two other reasons you should stay involved, leaving aside conflicts of interest:

    First, unless you have a long-term inside general counsel running the deal, your lawyer just doesn’t know your business and your deal as well as you do.  Good transactional lawyers want their clients to be as engaged with the documents as possible for this reason.  You’re taking a big risk if you assume the lawyer is getting the major deal points right.  Getting the deal points from the parties and translating them into contractual language is analogous to getting the specs from a customer and turning them into code.  There’s a lot of room for interpretation, misunderstandings and honest mistakes (yes, everyone makes them) on the way from general ideas to precise rules.  So it’s always a good idea to make sure you know where all of the main deal points are in the contract and that they’re worded in a way that makes sense to you.  Ask if you’re not sure.  Don’t just assume there’s something in the “legalese” you don’t understand.

    Second, there are business issues in the “lawyer issues,” so it’s not a good idea to leave them to your lawyer.  Leaving aside fights over semicolons (good deal lawyers pay attention to them but don’t fight over them), you should encourage your lawyer to give you enough context to understand and make business decisions about the real “lawyer issues.”  The difference between deal issues and real “lawyers issues” is basically contingency.  The parties are usually good at focusing on the major terms of the deal as they expect it to play out.  A good transactional lawyer also keeps a weather eye on ways events could take an unexpected turn, including fights, and how they will play out under the contract.   Lawyers are good at seeing those issues and coming up with ways to address them, but there are often choices to be made.  In those cases, the lawyer should be advising you, not choosing for you.  You’ll be better off if you decide which of these are important to you and decide between the options for dealing with them.  Leaving that up to the lawyers is tempting, but it’s likely to produce wasteful lawyer fights over things the parties don’t care about and, more importantly, substantive outcomes you didn’t understand and don’t expect.

  • http://www.chrisfharvey.com Chris Forrest Harvey

    Yes, “Nobody cares about you!” is outstanding advice.

    An outstanding book along these lines is “To Be or Not to Be Intimidated” by Robert Ringer.  I’d say a must-read for anyone in business, and especially anyone who negotiates.

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