Have a game plan for negotiations

Folio: The Magazine for Magazine Management, Sept 1, 1995 by Reed Phillips, III

There are few things more intimidating for a first-time entrepreneur than the prospect of negotiating a deal with investors--particularly when it is your deal. Although publishing entrepreneurs often have good negotiating skills, these have usually been honed doing business with printers, writers and other suppliers. Investors, on the other hand, are experienced negotiators.

When I sought financing for a magazine start-up several years ago, meetings with potential investors all ended the same way. After my presentation, the investors would say they'd think about it and get back to me. Then, out of the blue, I had a very different meeting. It went on much longer than previous investor meetings, until finally the investor said, "Okay, I'm interested. What do I get for my investment?"

I was surprised and unprepared for the situation, even though this was the very question on which the viability of my startup depended. I finally regained my composure enough to muster a response.

My mistake was in thinking that all first meetings with investors are preliminary. Raising financing, however, is anything but logical. Because the process is so unpredictable, it is important to anticipate events so that questions such as, "What do I get for my investment?" can be answered immediately with a cogent, well-rehearsed response. Here are a few guidelines to help you make sure you've anticipated as much as possible.

Set goals: What do you want? The first step is for you, the entrepreneur, to decide what you want from the deal. The best way to determine this is to assess the situation from two perspectives: First, what you think you deserve; second, what you think you can justify to investors. Then, do a reality check: Ask your advisers and other confidants if they think your assessment is fair. Also, try to find out what arrangements other entrepreneurs have negotiated with their investors and use this information to support your proposal. Your goals may include retaining operating control, obtaining an employment contract, and negotiating for equity and performance bonuses. Be sure to prioritize your goals.

Establish negotiating roles in advance. Designate a lead negotiator before you start the fundraising process. Some entrepreneurs have their investment adviser, a lawyer or an accountant do the negotiating. Others handle it themselves. Regardless of who is chosen, investors will expect the direct involvement of the entrepreneur. In fact, many investors use the negotiating process to evaluate the entrepreneur's skills. Negotiating sessions are one of the few opportunities to see how the entrepreneur performs under pressure. Choose the team member with the most experience and credibility in negotiation situations. This is not the time to test unproven skills.

Make sure advisers know your objectives. Advisers may include investment bankers, lawyers and accountants--all three together, or in a variety of combinations. Advisers are hired to ensure that the process runs smoothly and that the entrepreneur achieves his or her objectives. Be aware, however, that choosing the wrong adviser can wreak havoc. I once hired a lawyer who assumed he was going to be directly involved in the negotiations. When he started to take aggressive positions with the lawyer who represented the venture capital firm I was negotiating with, I had to replace him. The new lawyer listened to my goals, rather than trying to display macho negotiating skills.

Focus on getting to yes. The objective of any negotiation is for all parties to reach agreement. Ideally, there will be only two parties involved in the negotiations. However, this is not always the case. Each additional party increases the complexity of the deal exponentially.

During negotiations, constantly ask yourself this question: Is this a good deal for all the participants? If it's not, the deal will probably never get done. Or even worse, it will get done, but will unravel as resentments fester and grow with perceptions, true or not, that one participant got a better deal. Because start-up investing depends so heavily on the relationship between investor and entrepreneur, the deal usually hinges on their ability to get along.

Don't allow personalities to sidetrack the process. Although it is important to understand the goals of the other parties and to appreciate any personality quirks, do not focus on the other party's issues at the expense of your own goals.

Unfortunately, gamesmanship finds its way into negotiations all too often. Remember, though, that the best revenge is getting what you want. I'll trade tangible results for ego-stroking any day.