As a start-up, regardless of your background or knowledge on term sheets, learning about the necessary tools and tactics for negotiation is a must. The goal of a negotiation is not to win but rather to reach an agreeable position for both you and your counterparty. While lawyers are often involved in the negotiation process between start-ups and venture capitalists (VCs), it is still important for a start-up to know about and enhance their negotiation skills and tactics. The article discusses the key points to consider for a successful negotiation.
Prior to engaging in any negotiation, you must deliberate on your goals and have a clear understanding of the ultimate terms on which you are willing to strike a deal. One must truly be patient and be well prepared for a negotiation.
While you should be comforted by the fact that you have probably been implicitly using your negotiation skills throughout your life in your daily routine, you should also keep in mind that when dealing with potential investors, it is important to truly hone your skills prior to sitting at the negotiation table. Accordingly, it is important to have a set plan with respect to your targets, the commercial terms which you are willing to concede, and, equally as important, the terms which if not agreed to will ultimately translate into you walking away from the deal.
Without a set, albeit flexible, negotiation plan, it is easy to lose sight of the bigger picture in terms of your start-up's needs. In addition to having a clear picture of your own targets, you must also invest time into getting to know your counterparty. Knowledge of your counterparty's interests and targets will ensure a smoother negotiation and ultimately reaching an agreeable position for both parties.
Besides knowing how to deal with your counterparty, there are numerous ways to increase your negotiation leverage. One way to gain leverage in a venture capital financing is to have different term sheets from various VCs. Admittedly, it is quite difficult to juggle numerous parties at the same time; however, this may lead to a fear of missing out (commonly referred to as FOMO in the industry) whereby VCs will be prompted to invest in your start-up because they do not want to lose out on the opportunity. It is important to note, however, that having various term sheets is not advisable where a term sheet has a 'no shop' clause, whereby the investors and the start-up agree to not negotiate with others for a certain period of time.
While it is immensely helpful to be knowledgeable about things to do to successfully lead a negotiation, it is also important to know about things that you should avoid in a negotiation. Firstly, it may not be advisable to make the offer first. Unless you have another concrete offer on the table, by making the first offer you may be at risk of aiming too low, or too high in some cases.
Additionally, one of the most important tools is to be a good listener in a negotiation and as such by overly talking, you may be harming your negotiation position by revealing too many of your cards to your counterparty. Being a good and patient listener allows the space required for your counterparty to reveal their position, which will ultimately benefit you in the negotiation. Lastly, never assume that the other party has the same ethical code as you. While others may struggle with maintaining an ethical posture, you should always ensure that you remain ethical and
In conclusion, the keys points in leading a successful negotiation include being prepared, knowing your targets, knowing your counterparty, and last but not least, being a good listener.