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://twitter.com/hongdquan Hong Quan

    I might be the only recruiter in the world that agrees with you. But I hope not.

  • http://GeekAtSea.com/?utm_source=disqus&utm_medium=display_name&utm_campaign=disqus_display Kirill Zubovsky

    Mark, this remind me of the advice one professor gave me: “nobody cares about you!” Although personally I tend to forget, it’s been useful ever since. It’s not that other people don’t want you to win, they just want to win in their own game more; it works the same for all of us.

    Very good piece, as usual. Thank you!

  • http://anthonybullard.me Anthony Bullard

    Thank you so much for posting this article.  I am often very reticent to relinquish control over important matters, but often got admonished for not understanding “the way things are done” by these professionals who, admittedly, done this way more than I have or probably will.

    But I believe as you do that you have one company to sell, you must always be principal to those critical matters of business.  Once again, I appreciate this post, and this entire blog.

  • http://anthonybullard.me Anthony Bullard

    Thank you so much for posting this article.  I am often very reticent to relinquish control over important matters, but often got admonished for not understanding “the way things are done” by these professionals who, admittedly, done this way more than I have or probably will.

    But I believe as you do that you have one company to sell, you must always be principal to those critical matters of business.  Once again, I appreciate this post, and this entire blog.

  • http://twitter.com/rekatz reuben e katz

    Mark, it’s so easy to be trusting of 3rd parties. So many entrepreneurs find it just easier to let 3rd parties ‘do their jobs’ when it’s really the CEO’s job to see things properly to the finish line. I’ve had this happen recently with the sale of one of my family business where the banker had his own agenda (minimize his work), my investor had his (to get repaid max$) and buyers selected litigation attorneys to do a simple purchase agreement (hence their agenda was write un-signable document forcing litigation pre or post sale). Had to meet President of the bank to get paperwork done, keep the investor patiently waiting (he was aggressive when the bank took too long and the legal work came back unsignable…he wanted to kill the deal out of spite), and I had to force the buyer to go with a simple boiler plate agreement at the risk of losing everything. Thank g-d it worked out and we had a successful exit, but all of the 3rd parties had very conflicting agendas, while mine was a simple sale of a business, paying out a handsome profit to investors and liquidating an asset, something I transparently agreed was best with the investor. 

  • http://twitter.com/rekatz reuben e katz

    Mark, it’s so easy to be trusting of 3rd parties. So many entrepreneurs find it just easier to let 3rd parties ‘do their jobs’ when it’s really the CEO’s job to see things properly to the finish line. I’ve had this happen recently with the sale of one of my family business where the banker had his own agenda (minimize his work), my investor had his (to get repaid max$) and buyers selected litigation attorneys to do a simple purchase agreement (hence their agenda was write un-signable document forcing litigation pre or post sale). Had to meet President of the bank to get paperwork done, keep the investor patiently waiting (he was aggressive when the bank took too long and the legal work came back unsignable…he wanted to kill the deal out of spite), and I had to force the buyer to go with a simple boiler plate agreement at the risk of losing everything. Thank g-d it worked out and we had a successful exit, but all of the 3rd parties had very conflicting agendas, while mine was a simple sale of a business, paying out a handsome profit to investors and liquidating an asset, something I transparently agreed was best with the investor. 

  • Mat Tyndall

    Great advice on what to look out for. I recently received similar advice to not rely on a lawyer to find every related patent because incentives and understandings are not the same. At the end of the day, it matters a hell of a lot more to me than him if I get called out for infringing on a patent years down the line.

    Nevertheless, I couldn’t have drafted the rest of the patent without him and now I can officially say we have patent pending technology!

  • http://twitter.com/evarhelyi Edith Varhelyi

    Great posting again, Mark. I think the overall rule for using intermediaries is that you should never relinquish control. I found that a lot of people do not actually spend time selecting these intermediaries and end up making a poor choice. Just because a lawyer/recruiter /etc comes with a great recommendation, you still need to make sure they are right for you.

  • http://paramountessays.com/essay buy essay online

    interesting thoughts

  • http://termpaperwriter.org/research_paper custom research paper

    I enjoyed reading your articles. This is truly a great read for me. I have bookmarked it and I am looking forward to reading new articles. Keep up the good work.

  • http://www.voluntarysectorhelp.co.uk/blog Admin Team

    Great article, much appreciated.

  • http://twitter.com/JessiDarko Jessica Darko

    I’m amazed you do reference checks.  Any company with any sense will only give you the start date and the finish date.  Anything else opens themselves up to liability.  Also, if you’re doing reference checks, you’re admitting that your hiring process is incompetent.    It isn’t hard to find a group of people who will say nice things about you… but it doesn’t really tell you how good someone is going to be on the job.  

  • http://www.linkedin.com/in/rajatsuri Anonymous

    rather timely article, thanks Mark!

  • http://www.princetonfamilyphysicians.com Family Physicians

    Middle Man seems like midgets.

  • Mattcplc

    A very topical article, with some key advice, given the circus going on in London currently around News International…..

    Thanks

  • http://tribe.fm/luis Luis Correa d’Almeida

    I find there is a subtler problem that is many times as important.

    In many cases, the third party is ‘selling’ you and/or your company as it makes the introduction. Yet, they are far from being in a great position to do this adequately. They do not posses an intimate knowledge of your business. They do not breathe your culture. And they are definitely not as passionate about your business as you are. By the time you get to negotiating, you may need to step back and realign expectations due to a poor job upstream.

  • Staff

    Very informative

  • http://thesistown.com/ thesis

    very interesting. and i liked the summary!

  • http://byJess.net Jess Bachman

    And the more you can develop those “middle man” skills the better.  I am a graphic designer but have to work with the press for clients.  Now i have connections in the press for my own needs.

    Middle man can also be coders, designers, or whoever is accomplishing something you cannot.  I wish I could code to cut out the dev middleman.  Coders often wish they could cut out the designer middleman.

    We obviously can’t do everything, but the more you have at arms reach (your own arms), the better.

  • Jon Nguyen

    This reminds me of the interview you did a while ago with Michael Robertson, when he talked about raising money for MP3.com – his lawyer was trying to discourage him from asking for some of the terms he wanted, but he got them in the end.  Definitely worth checking out for anyone who hasn’t seen it yet.

  • http://www.facebook.com/profile.php?id=747972570 Dan Deppen

    Makes me think of an interview with Warren Buffet a few months ago when they were asking him if he used Moody’s ratings to assess bond risk. His answer was basically of course not.

  • Anonymous

    Mark,
    As an Executive Recruiter, I encourage my CEOs or Board Members to do some of the reference calls or use a third party service.  Of course, we have done initial references before anyone makes our final slate or panel.  Again, for the more in depth, I encourage the client to conduct or oversee them this allows them to ask the follow questions that are important to them and possibly build future business relationships.  We always present our reference checks as looking for any potential downside with the candidate, looking to assist the client in managing against that as we all strive for top results.

    Mark Landay
    Dynamic Synergy
    Executive Recruitment

  • http://twitter.com/Kressilac Derek Licciardi

    “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.”

    To me, that single statement pretty much sums up the entire article.  If you’re a fan of following the money to figure out motives, this statement rings true with all of your examples. 

    More specifically, it’s interesting to see it in action with job recruiters.  As you progress in your career and gain expertise that puts your salary requirements above the “average” for your job, recruiters have less and less of an ability to help you.  The converse is true as well.  Coming straight out of college, a recruiter is an amazing way to get started in whatever industry.  It all boils down to how hard they have to work to move you down the assembly line of business they face every day.  If you’re overpriced relative to the average, they have to work harder, even if your price is justified by the value you bring to the table.  Why work three months to place you for 10% of your salary when they can place 3 – 4 junior or on-market candidates with a combined salary of 2x-4x yours for the same 10% or total salary?  It doesn’t make any financial sense for the recruiter to work for you.  Unless something falls in their lap you’ll get little to no traction from a recruiter in that scenario.

    Your goals (maximizing your income against your abilities) and their goals, placing clients for commissions are dramatically out of alignement.

    The same notion applies to real estate.  Every region has an “average” home value in maybe three strata covering different income levels.  In our area, middle class is $200K – $300K.  Selling a home for $350K is dramatically harder than selling one in a “down market” for $245K.  A real estate agent will tell you to sell your $350K home for $300K or sell two homes at $245K in the same timeframe.  The additional work required for you to get the right price for your house doesn’t put food on their table any faster so they will actively work against your interests in the name of getting the deal done.

    Your post couldn’t be more true and the root of it all stems from that simple elegant line in the beginning of the article.

  • http://www.alearningaday.com Rohan Rajiv

    The Freakonomics story was eye opening! And I think there’s a typo in your agent’s part – she *was annoyed

  • http://www.twitter.com/biggiesu Mike Su

    At the same time using a middle man wisely is also a huge strength, provided that you are dictating the negotiation. Just like emissaries are important in geopolitical negotiations, having a middle man playing hardball is helpful in driving difficult points across without damaging a relationship you need to have post-negotiation (much like you mentioned in using reference checks). For example in the acquirer negotiation, you can have your banker do all the hardball points that need to be made and push them via the banker (just be sure they are the addressing *your* desired points, not theirs) and if it looks like it’s going south, you still have the opportunity to step in and say, “sorry, stupid bankers getting carried away, let’s talk for real” whereas if you are the one fronting negotiations from the beginning, there’s no way to soften that, and if it gets contentious, it makes the relationship post-merger much more awkward.

  • http://www.betsmartmedia.com Jesse Learmonth

    Expanding on the notion of drafting sessions:

    My company is working with an insurance agent right now to get company-sponsored life insurance in place for directors and principals. The insurance agent told me, “when it comes to this stuff, I require an ‘all hands’ meeting”. And I said, “huh?”.

    He recounted tales where he wrote similar policies for companies that didn’t think about legal and tax implications of life insurance, which obviously ended up in a clusterf*** when policies needed to be paid out (his lead story was how a widow sued her deceased husband’s business partners for the policy b/c it wasn’t done in accordance with the shareholder’s agmt… messy).

    Long story short, this insurance agent – as a condition of doing business – requires a single drafting session where he, company directors/principals, company counsel, and company accountants are all seated around the same table as the policy is debated from each person’s perspective. By the end of the session, he has all of the required inputs to put together an air-tight policy.

    Most like him would probably be just as happy putting some generic policy together, cashing the cheque, and moving onto the next client. But you won’t catch me complaining ;)

    Jesse

  • http://twitter.com/PieterDuboisFI Pieter Dubois

    I think you’re too kind on the bankers (See Michael Lewis’ the big short).

  • Ani Chaudhuri, Whodini Inc.

    I love the article, it has been 100% true in all of my 3 start ups. You have been spot on, including the statement that investors do not get a penny of the employee earn-outs. 

    An observation is in order – You have tended to soften the hammer on VCs by prefixing every blow (you are your principal) with a dollop of padding (we’re both principals in a sale). 

  • http://www.smallbusinessbible.org Small Business

    An Interesting Topic.

  • Thomas Ruland

    Great article. Could you eleborate on the “flat spots” in liquidation preference or push me in the right direction? How does that occur?

  • http://simplecaralarm.com/ Ted Thower

    In this competitive world life is a race. Man is Always searching for the next level to go.

  • nrrrvs

    excellent article. thanks that was a great use of my time.

  • http://www.dauntlessfund.com Lee Weinberg

    I will comment only on lawyers. Mark, you have bad lawyers who are not
    putting client interests first, or you are misjudging the source of the
    problem. I agree 100% with the all-hands negotiating session approach,
    but I have often strongly urged (BEGGED) multiple times for all hands
    meetings and not been able to get them when acting as counsel for a
    client. In each case we “negotiated by email” the deal fees and the
    frustration went up and up.  I believe it was the PRINCIPALS, and not
    the lawyers, who were resisting the meeting, foolishly thinking it was a
    time-suck for them and a way lawyers try to get more fees!  I am sure
    some lawyers have schedules and styles that make it tough to get an all
    -hands. FIRE THEM, Mark, and hire lawyers who care about results. They
    do exist. Maybe even one who is also a business-person/entrepreneur?  
    :-)

  • http://twitter.com/boilingice Patrick Kedziora

    Spot on Mark. I especially like your point about getting everyone in the room to negotiate/finalize the legal agreement. It simply works. I wouldn’t do it any other way. Great post. Thanks.

  • http://www.pree.co Matthew Jackson

    Glad I found your website and blog. I am the President of a start up and you have a lot of great articles I need to read. I see a lot of start ups giving away to much of the control in favor of the money today.  Usually in a few years they realize the mistake they have made but by then it is way to late. 

  • Anonymous

    Any problem solving for need a Middle man, they play good roll in between to solving problem. As well  they helping essential in  done for there specialize in something for done to do.

  • http://www.LouisvilleChiropracticRehab.com louisville chiropractic

    Sometimes giant corporations preferred to use VC to maximize customer care but it is often unnoticed that they are being overruled.

  • Anonymous

    Mark – this is an interesting post. I think the other side of the argument is what I would call the retail stock broker argument. If  realtors do better with their own houses, I would love to know how much better brokers do with their own portfolios.

    My premise on retail brokers is that most of their clients would do a better job investing their own money , if they only could do it full time (and wanted to do it). These two issues seems to underlie your examples: clients who don’t want to negotiate or have ‘more important things to do’.

    Your encouragement to entrepreneurs to ‘not have something more important to do’ and to ‘want to do the best for your company’ is bang on.

  • Robert Thuston

    Thanks for the great post… I enjoy when I hear a setting, characters, a plot, and specifically my role as the leader.  It just sticks with me better.

    “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….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.”

  • http://www.marketing-startups.com Conrad Egusa

    Wow, great article Mark.

  • Dave_ML

    Great post. As someone who has been both an agent and a principal, I agree that people who have real interests at stake must get in direct contact to resolve key issues and to find alignment. Face to face with both principals and their agents is best, but not practical for some circumstances such as a VC investment unless everyone happens to be in the same market. The VC financing fee structure is so low for lawyers driving across town could blow up a budget. 

    However, it also takes great courage as a principal to know when someone knows more than you do and when you need to take a step back to think.  The one danger with face to face negotiations for the unsophisticated/inexperienced party is that they can easily get railroaded to a bad outcome by the more experienced party who can think through alternatives in real time in a way the inexperienced party cannot.Too many principals are afraid to overrule their agents, particularly those who try to apply general rules to specific situations/businesses where the rules may not be applicable. I seek the input of my agents (lawyers, bankers, accountants, etc.) but ultimately it is my decision or the decision of the relevant people at our company that counts. It is what my company pays me/us for. If a decision goes wrong, no one says “well, the lawyers told me to do X”, I say “I got that decision wrong.”Too many principals also delegate their thinking. The sheer number of people who do VC financings or M&A transactions who don’t review/build/analyze the Excel liquidation preference model is astounding.  The results are often not intuitive no matter how much of a quant you are and the only way to be sure is to build a model and stress test the assumptions. Principals rely on a lawyer or accountant or (worse) the VCs, and it is dumb.

  • http://hirethoughts.blogspot.com Donna Brewington White

    Hi Derek,

    It may help you to know this: 

    The more highly you are paid, the fewer jobs there are, and the more competition for those jobs.  This has little to do with recruiters’ willingness to help fill those jobs.

    If you are at the top of your game, then no matter how highly you are paid, we will come after you.  The only limitation to our doing so is the likelihood of our client’s willingness to hire you. 

    While companies are more inclined to use recruiters for more difficult to fill jobs — and this is more often the case as you go higher up the job ladder, there is also more of a tendency for companies to use their networks to hire at these levels — when this is feasible.  

    As you go higher up the ladder you will probably need to switch recruiters.  As an executive recruiter, it is the rare exception for me to recruit straight out of business school and NEVER straight out of undergrad.  Recruiting an executive is a different recruiting process and different application of skill.  

    The most important thing to know — and this is KEY — is that we don’t work for you. You are not paying the fee.  Any recruiter worth his/her salt will represent your best interests to the best of his/her ability (which in the end benefits our client as well) but our loyalty is to our client.  And if we can’t be loyal to that client, then we shouldn’t work for that client. 

    And, lastly, if your recruiter is earning a 10% fee, well, I don’t even know what to say about that unless the company is also giving him/her equity.

  • http://hirethoughts.blogspot.com Donna Brewington White

    You are not.

    At least most of what he said.

  • http://hirethoughts.blogspot.com Donna Brewington White

    As someone in one of these roles, I can say that I am best able to represent the client’s interests when he/she works in a collaborative partnership with me.  In that type of relationship our cards are on the table and we know our strengths and limitations in the process and there is a fluidity to how we work together.  I am free to provide my expertise to the fullest and yet with a level of accountability such that the client never relinquishes ultimate responsibility for the results.    

    With regard to references, I have known recruiters (especially in a firm I recently worked with) who are completely objective.  It is hard to imagine not being able to look the client in the eye with a sense of assurance in recommending a candidate.  Also, if the recruiter is fully present and has good instincts, he or she will already have some sense of where the trouble spots might be and not only discuss these with the client, but probe for these with references.

    However, I still agree that the client should talk to at least some of the references or at least reserve the option to follow up with references.  @marklanday:disqus already gave some excellent reasons for this.  Although, my clients rarely opt to do this.   Another alternative  is to discuss with the recruiter beforehand the questions being asked and where to probe.

    If the recruiter has not already raised concerns or questions about the candidate, then this is a warning.  Not even the best candidate is perfect.  But, this goes for companies too.  The more that is on the table beforehand, the more successful the long-term relationship between the company and the person hired — and the recruiter.

    Mark, I am continually impressed by your insight in my profession, and a lot of other things for that matter.

  • http://twitter.com/Volnado Volnado

    I am going to send this to my lawyer so he sees why I was pressing him so hard on the turnaround on my last deal (which was botched due to over-lawyering and document turnaround time)

  • http://giffconstable.com giffc

    Nice post. On bankers, I wrote this in a longer post on selling one’s company: If you do have a banker, the role of a hard ass on your side (board member, investor, or CEO) is also important. Most banker compensation structures reward for a higher price, but pay very little if a deal does not happen. So to the banker, any deal is better than no deal. The hard-ass’s job is to make the bankers as worried about you walking away from the table as the buyer walking away!

    But I do believe bankers can help get a higher price as well as save deals from falling apart simply by acting as emotional buffers.

  • http://twitter.com/Doffner90067 Daniel Offner

    I agree with you in general and in particular about lawyers and real estate agents, being a corporate lawyer who also bought and sold real estate and had to deal with many real estate professionals.

  • Chris Field

    I love(!) Mark’s suggestion for a drafting session to get deals done more efficiently and quickly.  As an engineer-turned-Silicon Valley corporate lawyer in my most recent past life, I often bridled at the inefficiency of completing deals and I think Mark offers a very pragmatic suggestion.

    I would even suggest that the business principals agree in the term sheet that the parties will hold a drafting session.  There is probably a bit of an art to determining when in the deal process a drafting session should be held, especially to optimize for the benefits of using intermediaries (such as those mentioned by Mike Su elsewhere in the comments).  A good rule of thumb might be to hold a drafting session after each side’s lawyers have had one turn at revising the documents.

    Drafting sessions are common in the grueling and tedious process of drafting public offering documents.  The sessions bring together the company executives, accountants, bankers and everyone’s lawyers.  Though there are times where certain folks may not be active participants in the drafting session, there is no question that the overall efficiency is increased when everyone is available and you can gnash teeth and move through the documents in a definitive manner.

    We live in a world that is largely asynchronous, where we all operate on our own schedule.  Most of the legal work of doing deals is done asynchronously.  From my days of studying electrical signaling, I remember learning that a principal benefit of asynchronous communication is that the setup is fast and cheap.  But asynchronous communication includes more overhead–data with no useful information.  Synchronous communication is the way you get more throughput.  Timed properly in the deal process, a drafting session is an intense dose of synchronous communication that can minimize “over-lawyering” and really help move a deal along.

    JP Morgan’s acquisition of Bear Stearns is probably no model in deal-making from an economic standpoint (fire sales often aren’t, especially for the seller).  But, the acquisition was negotiated and signed in a weekend!  The point is that deals can be done as fast as the business parties dictate.  As Mark points out, it’s up to the business principals to make it happen.  Remember, your lawyer is there to serve you.

  • http://simplifilm.com Chris Johnson

    Mark, this is an incredibly good post, and I thank you for writing it.

    Now, the thing that you miss – that nobody caught – is taking variance off the table.  Even freakonomics missed that.  Getting to the absolute best dollar possible on a transaction is one outcome of a negotiation.  But, killing a deal is not what we want to do. 

    Having a transaction close that sits with ones best interests is better than trying to eek out every bit from the other party.

    An entreprenuer that is making life-changing money is best served to do the deal.  If his net worth is 500k now, what’s the difference between 15 and 18mm?  None.  Get the damn thing closed, before the music stops and there are no chairs.

    A Real Estate agent is correct when they want to offer a big signal to the other side saying “do this deal,” because keeping it together eliminates variance. That’s legit.  For people that value an extra 1% over the convenience of having disposed of a high net worth piece, then sure, you’re right, do the deal.

  • http://www.brekiri.com/ Greg4

    This doesn’t make any sense. It’s not the hiring manager’s problem whether former companies open themselves up to liability, and people often (very often) say more than they strictly should. Reference checks shouldn’t be restricted to the people on the candidate’s list. And they’re not really intended to tell you how good someone is going to be – that’s what interviews and all the rest are for. They’re intended to uncover any red flags you might have missed.