Negotiating Contracts

Appropriately named investor I once worked with:

Dick was someone I thought of as a “pathological negotiator,” a control freak who would negotiate every crossed “t” and dotted “I,” until he got his way. He was addicted to negotiating every point in every contract or deal. His unreasonableness and desire to win caused us to lose business opportunities and for vendors to stop returning our calls. I struggled to get him to appreciate that small companies couldn’t waste valuable energy fighting over meaningless lawyer jargon, but he saw that as a weakness in my leadership style.

He already had a notorious reputation for being difficult to deal with, and he certainly added to it while I knew him. His inflexibility and short-term vision literally pushed people away and soured relationships. He was a highly skilled negotiator and would probably be the star of any class or training situation. In the real world, however, his ego led his brain. Knowing his style, others and I used it against him because when you know that someone needs for their ego to experience a win, it is easy to set them up.

One time I got into a direct negotiation with him. I would have been happy with a deal at a value of 40, and if he had been a reasonable man, we probably could have sat at a dinner table and both agreed a common sense price around that number. Knowing his inability to do a deal without hard negotiating, however, I let it be known to a third party (that he thought was his spy in the building), that I would be happy with a value of 50. He could not resist the negotiation and I gave him the impression that his efforts were wearing me down over several weeks. I started at 60 and he wore me down to 50. He felt like a winner, but his foolishness cost him an extra 10… and yes we are talking millions. I would have been happy with a lower number, an amicable deal, and the chance to do other deals in the future. As it was, I took my gain and made a point never to deal with him again.

When it comes to negotiation skills there are only two rules that you must adhere to in order to successfully achieve effective contracts:

He who mentions price first loses. Always. No matter what number is thrown out at first, the purpose of negotiation, even the friendliest one, is to come to an agreement, and the agreement will rarely be on that first number. Whatever price you throw out first, the final one will be different. It is smart to always let the other side throw out a number first

When you are a small company, don’t get greedy

George Rathmann (built Amgen and ICOS) used to drill into his staff “when you are a small company and get offered a fair deal take it; the secret is to survive to one day be powerful enough to negotiate.” I think it sound advice and have come across many entrepreneurs who regret not doing that. Just last week I met someone still treading the boards when a few years ago he was offered $20 million to sell his shares. He thought the share price would go up. It didn’t. He is a bitter man now.

As a start-up entrepreneur and perhaps shy of negotiating you might have an advantage. Any experiences to share?