Entrepreneur

Five negotiating tips for startups

(Editor’s note: Scott Edward Walker is the founder and CEO of Walker Corporate Law Group, PLLC, a law firm specializing in the representation of entrepreneurs. He submitted this column to VentureBeat.)

A reader asks:  We’re a bootstrapped startup in the Valley, and we’re getting some serious traction.  Now we’re seeing interest from potential investors and we’re also trying to negotiate a couple of partnering agreements.  Unfortunately, nobody on our team has any experience negotiating deals.  Got any tips?

Answer: As you’ve already likely discovered, you’ve got a pretty big hole in your management team – one that’s worth filling fast. Negotiating is never an easy process. That said, there are a few things to keep in mind when you start putting the deal together.

Check your emotions and remain disciplined. Be careful about becoming emotionally wedded to a particular deal. It’s easy to get excited when an investor waves some money at you – but you run the risk of getting drawn into the investor’s web (particularly the further along you get in the process).

It’s critical to understand this dynamic.  Startups often negotiate with people who are far more deal-savvy than they are (such as venture capitalists or corporate development professionals) and who are masters at playing on emotions.

I saw this first-hand in New York City when I represented successful private-equity firms. The best dealmakers have an extraordinary ability to take their emotions out of transactions and remain disciplined.  They will generally walk away from a deal if it gets out of their comfort zone (with respect to the risk profile, price, etc.), regardless of how much time and money they have expended.

Try to create a competitive environment.  Nothing will give you more leverage in deal negotiation than a competitive environment (or the perception of one).  Every investment banker worth his salt understands this simple proposition.  Not only does competition validate a firm’s interest, but also it appeals to the human nature of the individuals involved.  Competitors can be played-off of each other and, as a result, you will be able to strike the best possible deal.

Keep in mind this is a game that has to be played very carefully. If not, you may end up with no deal at all.

Don’t blink.  There comes a point in just about every deal where both sides have dug into certain positions and the question becomes which side will blink first. For example, in a venture capital financing, perhaps the issue is the pre-money valuation or the liquidation preference. Whatever the issue, to maintain negotiating leverage and credibility, it’s often critical to hold your ground.

If you have flatly stated that “this issue is a dealbreaker,” but later blink and agree to go forward with the transaction (despite not getting what you demanded), you will have undermined your credibility – and you could have your clock cleaned on other significant issues.  Like in poker, if your bluff gets called, it’s difficult to bluff again.

Watch-out for the “good-cop, bad-cop” routine.  Experienced dealmakers employ all kinds of negotiating tactics.  One of their favorites is the “good-cop, bad-cop” routine.  Here’s how it works:  The dealmaker plays the good cop. He’s smooth, friendly and agreeable – and will make you feel like all of your important issues are being taken care of.  But then the legal documents arrive – chock full of bells and whistles and boilerplate provisions designed to protect the dealmaker’s firm/company  – often with significant gaps on the deal points.

When the dealmaker is questioned as to what’s happening, the answer, of course, is “it’s my lawyer’s fault” (i.e., the “bad cop”).  This game continues throughout the negotiating process. The dealmaker will charm, while the lawyers pounds away on every significant issue.

Retain a strong, experienced lawyer to watch your back.  This is a bit self-serving, but every startup needs a good attorney to help it out.  Sometimes there’s just too much at stake for founders to be handling negotiations if they don’t have any deal experience.

An experienced lawyer will sober you and lay out the significant legal risks in a particular transaction. He’ll then push to negotiate reasonable protections.  If the deal sours and lawsuits are filed, well-drafted documents with appropriate protections can be a lifesaver.

Startup owners: Got a legal question about your business? Submit it in the comments below or email Scott directly. It could end up in an upcoming “Ask the Attorney” column.

Disclaimer: This “Ask the Attorney” post discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.


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