Negotiating is hard. There are many books on the subject such as “Getting to Yes” (disclaimer: I git payed if you buy this book). Some of these books will help teach you to be a better negotiator. Today I want to talk about one of the things I learned about negotiating… from negotiating: How to learn your counterpart’s position through negotiation.
When you are negotiating, you are always operating with imperfect information. You do not know your counterpart’s primary desires nor do you know where they are flexible. You can do things in your negotiation process to help understand what is necessary to come to a final agreement.
For example: If you are negotiating a work contract, you do not know if there is flexibility on the feature set or the budget. When I am faced with this situation, I generally break down a project into several optional milestones. This is a good practice for a couple of reasons. For the purposes of this discussion, when you break things down according to feature sets or phases, you have a rough idea what your counterpart is looking for and how much money they have to spend.
When negotiating with startup companies, I find they are generally more cost-conscious and will likely trim additional features or extra platform support in favor of a slimmed-down agreement. Other companies, especially larger ones, might be interested in all of the bells and whistles.
The response to a proposed list of optional milestones will tell you whether features or budget is more important to a potential business partner.
Unrelated to features or cost, you might also learn that time is important. If they urgently need to see something, you should make sure that you are getting a premium for making something urgent. If you need to dedicate extra time and energy towards shipping something as quickly as possible, that constitutes risk.
Another important thing to learn when you are negotiating a project is whether or not this is a part of a longer term relationship with additional projects in the pipeline.
When I am forming a new business relationship, I often want to understand the risks they are taking as well as the rewards. I am very happy to assume some level of risk in exchange for some of the reward. I am not afraid to ask for equity, or revenue sharing on the back end, for a project if I believe in the people I am working with or the project they are working on.
I have an hourly rate for cash-and-carry projects. I also have a discounted rate that I propose if there is an advisory role or stock consideration for getting involved. I do not offer this to every potential business partner.
When do you decide to trade off cash-in-hand for equity or revenue share? That is a great question. I will admit I discounted a large number of projects early in my career for upside. About three quarters of them were mistakes. If the only reason you are going to give them a discount on the work for equity is that it is out of their budget, you probably should not do the project. This is a good example of something that you can learn during negotiation.
The things I look for today in an equity-based relationship:
- They have proven product-market fit. They have some traction and customers use their product.
- They have strong financial backing. They have already raised some money from a source where they are likely to raise follow-on investment after accomplishing a specific goal.
- The leadership team has a strong track record. Whether they have managed large projects or brands in the past, or they have an impressive pedigree, I look for the founding team’s experience and how much I believe in their vision and ability to do something amazing.
Once you have established your counterparts’ flexibility on negotiation and you are close to a deal, you might find that there is still a gap between what they are asking and what you can deliver.
I sometimes bridge this gap through IP ownership. I am willing to discount some of the work that I do in exchange for ownership. I am happy to give a discount on a project if I am just sublicensing it, and I can exploit the IP on my own terms. I will give a company a six month or one year window to exercise a purchase on reasonable terms, generally after they have completed a milestone or raised funds to cover the cost of purchasing the final product.
If you are negotiating a project where there is a limited budget, and no willingness to be flexible on any of these points, there is something you can learn here too. You can learn to just say “No thank you” and get on with your life.
I also learned something else in a different kind of negotiation. This happened when I was working at a startup that was struggling to pivot. We were in conversations with investors and wanted to get some feedback on what we should do about controlling costs and headcount. When you ask them questions like this, you would expect them to say “we support whatever decision you make”. You can phrase your question in a way that will give you some clarity about what to expect from them in the future.
For example, we had to make some cuts to staffing to get to the next milestone. We asked our investors if they wanted us to make two levels of cuts, one now, and one later, or if we should do a bigger cut all at once. We were told very quickly that we should cut to the bone and do the bigger one. This was a really important piece of information.
If we were told that we could stagger cuts and get to the next milestone that would tell you that they have institutional support and willingness to write another check depending on what gets learned.
When you get told to do one big cut and that you should cut to the bone, that is a sign that you are likely not going to get another bridge note from your investor.
It was an educational moment for myself and for the rest of the management team and we planned accordingly.
I have gotten into the habit of being very thoughtful about my negotiating over the years and asking myself “What do I need to learn in order to deliver the best results for everyone?”
I would love to learn what kinds of things you learned from your own negotiations!
Thanks again for reading along. I know it is summer time. I know you have TikTokToes to watch or possibly New-Show-On-Streaming. In order to compete, I implore you to return here so I may emblazon your eyeballs with molten hot blasts of extreme thinkiness! Satisfaction one hundred percent guaranteed!*
*not an actual guarantee
