I'm not a great negotiator when it comes to venture deals.
The consensus seems to be that the VC has the power in negotiating venture deals, but I don't think that's true. We invest in less than 1% of the companies we see. So when I'm sitting across from founders that I want to back, I really, really want to make a deal work.
My costs of walking away are very high. That's a terrible bargaining position to be in.
What's worse is that I'm an accommodator. I like to please people. My expectation of reciprocity is very high. I tend to give before I get, expecting the other side to improve my deal in return. And often that doesn't happen.
So I've been reading a bit lately about how to be a better negotiator. The book I liked the most is Never Split the Difference, by Chris Voss. Chris is a former FBI agent who led international hostage negotiating. The book is simple but fun, with lots of interesting tidbits, and it has paid for itself a hundred times over by getting me an unexpected 30% off a recent shopping trip.
While you have to read the book to truly appreciate it, the part that really stuck with me is the haggling framework he calls Ackerman Bargaining. It avoids the predictable result of meeting in the middle and has some counter-intuitive bits that stuck with me. Most negotiations will include some haggling, and it's the part that most people would rather put behind them.
As Voss never tires to point out, however, "you fall to your highest level of preparation."
The framework has four steps, all fairly simple to remember:
1. Set a target price (the goal you want to get to).
2. Set your first offer at 65% of the target price.
3. Calculate three raises of decreasing increments (to 85%, 95%, and 100%).
4. Use lots of empathy and different ways of saying no ("how do you expect me to do that?") to get the other side to counter before you increase your offer.
5. When calculating the final amount, use precise, non-round numbers. $15,630,200 pre is better than than $15 million pre. It gives the number credibility and weight.
6. On your final number/offer, throw in a non-monetary item (that the other side probably doesn't want) to show that you're at your limit.
So let's dig into this a little bit. The first offer is an extreme anchor. It rattles the other side because it's way outside the usually rational ZOPA range of what they expected. It pushes them into action.
You give the next offers sparingly, asking well targeted questions to see if you can get them to bid against themselves. I recognize that well because I do it to myself all the time.
The next offers are staggered to signal that your opponent is squeezing you to the point of where they've gotten all they can. That makes them feel great about themselves - even after the negotiation is complete.
The non-round number is just human psychology. The more exact the number, the more we believe it has some basis in concrete reality.
Finally it's key not to lose sight of the person on the other side of the table. You're negotiating a thing, not each other's value.
Every bit of negotiating advice I've read makes it clear that empathy and respect is key.
You're playing a game, but the objective is not to destroy each other. It's to come to a workable deal.