“Ask the Business Attorney” – 7 Negotiating Tips for Entrepreneurs

by Scott Edward Walker on July 14th, 2010


This post was originally part of my “Ask the Attorney” series which I am writing for VentureBeat; below is a longer, more comprehensive version.  Please feel free to call me directly if you have any questions (415-979-9998).  Thanks, Scott


We’re a bootstrapped startup in the Valley, and we’re getting some serious traction.  Now there’s interest from potential investors and we’re also trying to negotiate a couple of partnering agreements.  Unfortunately, nobody on our team has any experience negotiating deals.  If you could just give us a few tips that would be great.  Thanks!


Here are seven quick tips for negotiating deals (some of which are skills that need to be developed over time):

Tip #1 – Check Your Emotions and Remain Disciplined. You have to be very careful about becoming emotionally wedded to a particular deal; it’s the same issue a first-time home buyer faces.  You’re going to get very excited as soon as an investor waves some money at you – and you will run the risk of getting drawn into the investor’s web (particularly the further along you get in the process).

It is critical that you understand this dynamic.  Entrepreneurs are often negotiating with guys/gals on the other side of the table who are far more deal savvy than they (e.g., venture capitalists, corporate development guys/gals, etc.) and who are masters at playing on entrepreneurs’ emotions.

As I saw first-hand in New York City representing big, successful private equity firms, the best dealmakers have an extraordinary ability to take their emotions out of transactions and remain extremely disciplined.  Indeed, they will generally walk from a deal if they get out of their comfort zone (e.g., with respect to the risk profile, price, etc.) — regardless of how much time and money they have expended.

Tip #2 – Try to Create a Competitive Environment.  There is nothing that will give you more leverage in connection with any deal negotiation than a competitive environment (or the perception of one).  Every investment banker worth his salt understands this simple proposition.  Not only does competition validate a firm’s interest, but also it appeals to the human nature of the individuals involved.  Competitors can be played-off of each other and, as a result, you will be able to strike the best possible deal.

That being said, keep in mind that this game must be played carefully; otherwise, you could end-up with no deal at all.

Tip #3 – Watch-out for the “Good-Cop, Bad-Cop” Routine.  Experienced dealmakers will often employ all kinds of negotiating tactics.  One of their favorites is the “good-cop, bad-cop” routine.  Here’s how it works:  The dealmaker plays the good cop and is smooth, friendly and agreeable; he will make you feel like all of your important issues are being taken care of.  But then the legal documents arrive — chock full of bells and whistles and boilerplate provisions designed to protect the dealmaker’s firm/company and often with significant gaps on the deal points.

When the dealmaker is questioned as to what’s going on here, the answer, of course, is “it’s my lawyer’s fault” (i.e., the “bad cop”).  This game will continue throughout the negotiating process as the dealmaker charms you while his lawyers pound away on every significant issue.

Tip #4 – Don’t Blink First.  There comes a point in time in just about every deal where both sides have dug into certain positions and the question becomes which side will blink first; for example, in a venture capital financing, perhaps the issue is the pre-money valuation or the liquidation preference; or, in an acquisition, perhaps the issue is the carve-outs to the cap on liability.  Whatever the issue, the rule of thumb in order to maintain negotiating leverage and credibility is not to blink first.

Indeed, if you have flatly stated that “this issue is a dealbreaker,” but then blink and nevertheless agree to go forward with the transaction (despite not getting what you demanded), you will have completely undermined your credibility and will have your clock cleaned with respect to other significant issues.  Like poker, if your bluff gets called, it will be difficult to bluff again.

Tip #5 – Leave Some Chips on the Table.  Speaking of poker, the best dealmakers always leave a few chips on the table.  What do I mean by that?  I mean they don’t fight tooth and nail to win every last penny (every issue) – knowing that such a “scorched-earth” approach will create ill-will and may blow-up the negotiations.  You generally have to compromise and give a little so that the other party feels like he or she is getting a good deal.

This is particularly important where there will be an ongoing relationship post-closing (such as in a venture capital financing or private equity acquisition).  You will need to work with the guys on the other side of the table post-closing, perhaps for a number of years.  Accordingly, you want to have a hugfest at the closing, not a boxing match.

Tip #6 – Control the Drafting.  This is an important (but often over-looked) key to effective negotiation.  Not only should you be retaining a strong lawyer to watch your back (as discussed below), but also you should try to have your lawyer control the drafting.  All good corporate lawyers understand this point.

For example, as a corporate associate at a large, New York law firm, I was representing Sony in connection with its acquisition of CBS Records.  Cravath, the lawyers for CBS Records, actually negotiated in the letter of intent that they would control the drafting.  Usually the acquiror’s counsel controls the drafting because the acquiror is paying the purchase price; however, Cravath was smart and got Sony to capitulate because they knew Sony was anxious to do the deal.

Tip #7 – Retain a Strong, Experienced Lawyer to Watch Your Back.  Finally (and this is obviously a bit self-serving), but every entrepreneur needs a strong, experienced lawyer to watch his or her back.  There is sometimes just too much at stake for entrepreneurs to be handling negotiations if they don’t have any deal experience.

The bottom line is that a strong, experienced corporate lawyer will sober you and lay-out all of the significant legal risks in a particular transaction; he will then push hard to negotiate reasonable protections.  If the deal sours and lawsuits are filed, well-drafted documents with appropriate protections become like a kind of insurance policy.


I hope the foregoing is helpful.  Like most things in life, strong negotiating skills can only be developed with practice and experience.  As you do more and more deals, you’ll start seeing patterns and start understanding human behavior that much better.

Tags: , , , , , , , , , , ,

2 Responses to ““Ask the Business Attorney” – 7 Negotiating Tips for Entrepreneurs”

  1. Thyaga says:

    Scott, thanks for sharing your experience. This is helpful, especially for those who are first time entrepreneurs (like me). I should say, it is one of the best articles which I have read in recent weeks. It is short & precise.