The Heart of the Deal — 3 Questions to Ask Before Every Negotiation
As an investor and business owner, I have spent my fair share of time negotiating and have come across all sorts of negotiation styles. The fact is, negotiations are part of everyday life, whether it is working through the nuances of a term sheet, untangling the details of a partnership agreement, or convincing my kids to hit the books.
Based on my life experiences and the books I’ve read, I have formed strong opinions on the best approach to negotiating. There is no “right” way to negotiate and not all negotiations are created equal. Successful negotiation isn’t a competitive sport with winners and losers — it’s a collaborative conversation that should always begin with the end in mind.
I always think through these three questions before every negotiation:
1. What is important to me in the deal?
This question isn’t as easy as it seems on the surface. In venture, while price and valuation are key, there are so many other considerations because the deal is just the beginning of a years-long relationship. What happens if the big chunk of equity and preferred terms you negotiated demotivate the founder or stifle a startup’s ability to raise future rounds? When you act like a shark in the moment, you often end up with the short end of the stick after all is said and done. If a deal is lopsided — or even perceived to be lopsided — the relationship starts off on the wrong foot. Trust is lost and it is hard to recover from that.
2. Who am I negotiating with and what is important to them?
Knowing who is sitting across the table from you — and where they stand — makes a difference.
Take the time to understand the background of the deal and the person you are negotiating with. Why do they want to do the deal? How important is timing? What factors other than price and valuation matter to them? Never assume you know how the other side feels or what their goals are. If you don’t know, do not be afraid to ask. By asking, you will gain trust and show that you are experienced and that you care about their goals as much as you do your own. The same goes for telling the other party what your priorities are. Leveling the field can go a long way toward getting a deal across the finish line.
One thing I’ve learned is that, even if your counterparty hasn’t changed, you’re never negotiating with the same person twice. As an example, when we first started Lead Dog Design, getting name brand clients was the key to building our reputation. We landed Fortune 500 companies by prioritizing good references over profit. But after we established ourselves as one of the top design agencies in NYC, referrals took a back seat to recurring contracts with predictable revenue and our approach to negotiating shifted.
Circumstances — and priorities — can change over time or even on a dime. Or maybe you’re just catching that person on a bad day. Be ready to adapt your negotiation approach to the situation at hand.
3. How can we structure a deal that enables us both to achieve our goals?
I always outline both the best-case scenario and the minimum terms I would be willing to take, knowing that the negotiation usually ends up somewhere in the middle. Years ago, I kept seeing an advertisement for a book called In Business As In Life — You Don’t Get What You Deserve, You Get What You Negotiate. I’ve never read it because the title turned me off. It made me feel like the book would teach me how to take advantage of someone in negotiations. I feel strongly that a good deal is one where both sides walk away feeling good about the terms and the relationship. Life is long and the world is small and the next negotiation with your counterparty may be just around the corner.
Here’s a real-life story of how it all comes together:
When our real estate fund was negotiating the purchase of the Hotel RL in Salt Lake City, paying below-market was important to us. During the course of negotiations, we learned that timing was the top priority for the sellers. They wanted to get the asset off their balance sheet before the end of the year. This knowledge presented us with the opportunity to structure a deal to secure the property for about 25% below the original asking price if we closed by year end, which we did.
My favorite book on negotiations is Getting More by Stuart Diamond.
Diamond uses scenarios to explain how to find out what is important to the other side. No sly tricks or tactics needed, the book teaches you how to gain knowledge and trust by getting to know the person or company you might be negotiating with. Whenever I am in a negotiation, I hope the other side has read this book as it encourages us to be more empathetic and open to options that might not be obvious at first. This leads to not only closing a deal, but closing a good deal and, in many cases, kicking off the beginning of a good, long-term relationship.
Written by Ron Heffernan