NJ Startups – Meetup #2New Brunswick, NJ27 February 2014

Entrepreneurial Negotiations and Deals:A Really, Really, Really Short Primer

Rhett L. Weiss, J.D.Executive Director, Entrepreneurship & Innovation InstituteSenior Lecturer of Management, Johnson Grad. School of Mgt.Visiting Senior Lecturer, Cornell TechCornell University

© 2014 Rhett L. Weiss. All rights reserved.

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Introduction: Presentation Overview

• Goals

1. Help you – as an entrepreneur -- negotiate well, including with “big players”

-- Think and act like a strong, conscientious negotiator without being big

2. Learn some negotiation similarities/differences between startups and big players

3. Warning: very high and quick orbit; short presentation (there is much more)

• Content

1. Introduction; My Background; Some Questions

2. Typical Entrepreneur’s View of Negotiation

3. Negotiation Defined; 3 Dynamic Parts; Sources of Negotiation Power

4. Deal Types

5. Process

6. Suggested Strategy Framework; Two Examples

7. Tactics Overview

8. Best Practices

9. Take Aways; Q&A

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Introduction: RLW at a Glance

• At Cornell– EII Executive Director; BR Suite, fellows program, events, other programming– Johnson Faculty: entrepreneurship, venture capital, & negotiations– Cornell Tech in NYC: Tech Enterprises (entrepreneurship); Innovation; Pitch Lab

• At Google– Strategic acquisition & dev. projects; negotiated deals with heads of state, CEOs– Conducted negotiation training worldwide

• Pre- and Post-Google– Serial and parallel entrepreneur, innovator, “dealaholic”– Founded, co-founded: bulk mailing (Jr HS through HS); DEALS® software (patent

holder) & DEALTEK consulting, data center, commercial bank, RE dev., aquaculture– XM Satellite Radio, Orbital Sciences, Motorola, AOL, Oracle JV, & other deals– Boards of Directors; C-level positions; bank COO; boards of advisors; mentor– Consultant; former Big 4 director and national mgt. team; now, global consulting– “Recovering attorney”; corporate, business, finance, and real estate transactions– Presenter, author

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Hey Entrepreneur, does this look familiar?

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Q: How do you negotiate with big players?A: The same way you eat an elephant!

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One bite at a time.

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“Negotiation”

• Multilateral

• Interactive

• Usually iterative

• Sometimes repetitive

• Process

• To accomplish goals

• At least 2 parties

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David vs. Goliath

Time

PowerInformation

Negotiation’s 3 Dynamic Parts: Time, Power, & Info

Time Available time to each parties;

time constraints Timing strategy and tactics

Information - 4 Types: Known to all sides:

Internet/public -- industry, market, or company info

Known only to your side (YS) & can be disclosed to other side (OS); vice versa

Known only to YS but cannot be disclosed to OS; vice versa

Needed but not yet possessed by one or more sides

Power - 7 Types: Title Reward/Punishment Consistency Charisma Expertise Situation Information

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Where does negotiating power comes from?

Perception,Anticipation

Knowing Process,Facts, & Strategy

Confidence,Ability to Act

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Negotiating Power

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Common Startup Deal Types• Contracts – from Ordinary Course of Business to Infrastructure to Strategic

• Goods (supplies, materials), Services/Outsourcing (project-specific and functional), Utilities

• Company-Level Buy/Sell (M&A); Asset vs. Stock Deal

• Founders Agreements; Investment Agreements

• Stock Option Agreements; Profit Sharing Agreements

• Employment Agreements

• IT Agreements: Data Center Hosting, Cloud, Storage, Service Level Agreements; Others

• Intellectual Property

• NDAs – Nondisclosure or Confidentiality Agreements

• License Agreements

• Development Agreements; Professional Services Agreements; “Work for Hire”

• Plans, Specs, Drawings, Designs, Trademark, Copyright

• Patent Assignments

• Leases

• Equipment

• Real Estate

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Four-Stage Negotiation Process

Prepare Set the Stage Close the DealMake the Deal

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Prepare

• Prepare. Then, prepare some more.

• Develop Game Plan; goal setting; values

• Strategy and Tactics: links, de-links, and concessions

• Assess 3 Components: time, “leverage,” and information

Set the Stage

Make the Deal

Close the Deal

• Contact w/ OS starts; building relationship; questioning

• Likelihood of agreement/no agreement

• Determine each other’s goals, values (2 meanings: valuations & standards), parameters, constraints, upsides, and downsides

• Determine opportunities: one-time deal, piece of action, future deals

• Start framing interests, positions, and issues

• Reassess time, leverage, information

• Set ground rules; protocols; agendas

• Decision making authority vs. responsibility

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Close the Deal

• Proposals: if . . ., then . . .; tentative/conditional

• Communication; watch for changes; question; listen

• Rapport or ‘chemistry’

• Roles in communications and at meetings; watch for changes

• Separating interests and positions; solving Issues

• Start compromising (make/trade interim concessions and agreements)

• Going from tentative to firm agreements, iteratively

• Conflicting pressures to close

• Retrading

• Common types of closes

• Walkaway power (real ability vs. theatrical)

• Getting through slow times, breaking deadlocks/impasses

• Going to war; how to fight in tough situations

• Confirming/memorializing the deal

Make the Deal

Prepare

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Negotiation Process Iceberg

Preparation

Closing the Deal

Making the Deal

Setting the Stage

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Suggested Negotiation Strategy Framework

1. Process• 1. Preparation; 2. Setting the Stage; 3. Making the Deal; & 4. Closing the Deal

2. Parties• Identify Your Side (YS) & Other Side or Sides (OS).

• Key team members for each side.

• Roles: Buyer, customer, seller, developer, strategic partner, acquisition target, technology licensor, principal, agent, advertiser, etc.

• Any additional players calling shots in or influencing the negotiation?

3. Deal Fundamentals• Subject or Object. What is the deal or negotiation about?

• Only a one-time deal, or future opportunities? Transactional or relational?

• Desired deal structure? Alternative structures?

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Negotiation Strategy Framework, continued

4. Necessary Deal Points• Examples: subject/object, structure, price, quantities, duration/term, frequency,

scope, IP ownership, due diligence/inspection rights, reps & warranties

5. Each Side’s Key Goals or Interests• Shared, complementary, and competing.

• What does each side really need vs. want? Separate positions from interests.

6. Each Side’s Issues• Problems, obstacles, or challenges that need solutions

7. Values, Principles, or Standards• What values (principles or standards) are important to each side?

• Compare: What is a deal point’s value (valuation or worth) to each side?

• Affect on each side’s framing of interests, positions, issues?

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Negotiation Strategy Framework, continued

8. Time, Power (or Leverage or Influence), and Information

9. Impasse(s) or Sticking Point(s)• What may prevent or is preventing an agreement?

• Where and why might the parties become stuck? Where/why are they stuck?

• What are the alternatives and substitutes for all sides?

10. Desired vs. Actual Results; Reality Check and Debrief• What is YS’s desired agreement? What is OS’s desired agreement?

• Must a complete agreement be reached by either side?

• At end of process, was a complete agreement reached?

• If so, what are its key provisions? Detailed resolution of each difficult issue?

• What exactly, if anything, is left unresolved or set aside? Only a partial deal?

• Or, if no deal at all, why not? Unresolved issue? One side walk away? Other?

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David’s Perceived Disadvantages … … Goliath’s Opportunities

Limited Capital

Lack of Experience

No Sales

Ready for Investment

Open to New Ideas Can Adapt/Modify Prototype

Entrepreneur’s framing can shape larger party’s strategy and behavior for the negotiation’s duration.

Two Entrepreneurial Strategy Examples --Example 1: Frame Disadvantages as Opportunities

Framed as

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Strategy Example 2: Pit Big Players Against Each Other

SoBe

$100mm

$100mm

$100mm

$70mm

$100mm

$100mm

$40mm

• Rivals can work against each other to their detriment and Entrepreneur’s benefit.• Entrepreneur with strong “Plan B” pressures rivals to make concessions.

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Common Tactics: Tools, Moves, Tricks of the Trade

• Viability, Likely Success• May seem counterintuitive

• Often are used incorrectly, like “splitting the difference”

• Generally work when used correctly; never work all the time

• Each has a counter-tactic

• Recognize OS's tactics• Let OS know: decreases OS’s game playing, increases your power

• Recognize the Difference Among Smart Plays, Bluffs, and Lies• Tactics reveal each side’s negotiation ethics, good or bad

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Closing the Deal

Making the Deal

Set the Stage

Reluctant

buyer/seller

The list

Feel, felt, found

Flinching

Uproar (we want it all)

First offer

Best offer

Flinch; Grimace

Play dumb, act smart

Trade-off

Good cop, bad cop

Higher authority

Squeeze

Funny money

Splitting the

difference

Printed word

Set aside

Decoy

Red herring

Nibble

Fait accompli

Set aside

Turn down, walk away

Withdrawn offer

Hot potato

Throw away concession; So what?

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Best Practices: 5 Traits of an Effective Negotiator

1. Understands and conducts negotiations as a process• A multilateral, interactive, and often iterative process to accomplish the goals

of two or more parties 2. Does the homework on a regular basis

• Masters the issues & their interrelationships• Masters information and adapts to changes in it

3. Maintains sensitivity and tolerance for interpersonal differences• Personality types• Nationalities, Cultures• Communication styles, methods, and content; notice the changes

4. Emphasizes areas of agreement, not disagreement• Explains and substantiates own points

5. Instills strong belief in OS that YS will uphold the deal• Shows integrity, reliability, and credibility

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Best Practices: 5 Do’s

1. Know your stuff – be on top of all sides’ facts, interests, and issues

2. Be a great communicator ( = listener, not just talker)• Keep your side informed of all key negotiation communications• Communicate regularly but carefully with OS

3. Consider own enthusiasm’s affect on concessions, agreements

4. Be alert to pressure• All sides are under pressure to deal, settle, compromise• Generally, the side under the most real or perceived pressure "loses”

5. “Keep your eye on the ball”: focus on movement, measure progress• Concessions and interim agreements• Statements, sometimes silence• Action, sometimes inaction

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• Best Practices: 5 Don’ts

1. Don't assume money or price is the all-important deal point• After all, it probably isn’t

2. Don't unnecessarily narrow your negotiating range or flexibility• When possible, don’t be the first side to make an offer or name a price

3. Don't narrow the negotiation down to only one issue• Negotiations are so much easier with at least two issues in play

4. Don't disclose your side's time constraints, deadlines, or pressures • . . . unless there is a compelling reason to do so

5. Don't become emotionally involved or egotistical• Don’t get personal• It’s typically counterproductive, and it’s a lonely place

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Time/Timing Power: 7 types Information: 4 types Process: 4 stages Strategies & Tactics Best Practices: 5+ traits,

5+ dos, & 5+ don’ts Thoughts & Actions:

Know how Goliath thinks but don’t act like Goliath

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Question or Comments? Please contact me!

Rhett Weiss: rweiss@cornell.edu