How to Negotiate in Three Easy Lessons

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When I was reading Walter Isaacson’s biography on Steve Jobs it suddenly brought back memories of the FBI repeatedly hitting the buzzer for my apartment rather forcefully ten years ago. Isaacson mentions that Steve Jobs and Dr. Larry Brilliant were best friends. Flashback to ten years ago, Larry Brilliant calls  the FBI and tells them I might know something about where Osama Bin Laden keeps his money. True story.

The next thing I know, someone is ringing my buzzer, “The police! We need to come up.” Then when we let them in (after I briefly considered running down the back staircase) they flashed their badges “FBI”. They said, “we had to say “police” because we didn’t want to scare anyone on the street by saying  ‘FBI’. “

Uhhh. Do you really think that is the difference between inducing fear and creating a feeling of calm?

Let’s hold off on that for a second. Three other things come to mind, maybe four, when I think of Larry Brilliant.

A)     First off, what a great name. It’s like he’s a mad scientist in a Flash Gordon movie (the old black and white ones, not the one where Freddie Mercury is singing while they are flying on these weird metal wings).

B)      Second, when Larry was running Google.org I had an idea for him and after all we went through (the FBI?) I thought he would respond but he didn’t

C)      The most valuable thing I learned from Larry Brilliant was when we were taking a break in 1999 at an ancient coin collection being held in the World Trade Center. Everyone there knew Larry and from booth  to booth we were sifting through the ancient Israeli coins, coins with Alexander the Great carved beautifully into 2000 year old silver, coins that I didn’t know the history of but Larry patientiely explained.

It was beautiful, interesting, and tiring, so we grabbed a coffee , sat down at a table and I asked Larry, for lack of anything else to talk about: what is the key to great negotiation? Larry was the CEO of some public company then. A company that two years later I would help the new management liquidate but that’s another story.

The reason I asked is because I consider myself a good salesperson. I don’t have many skills, but there’s always a point with each person, on each topic, where they will say “Yes” to something. So many girls said, “No”to me in high school I had to dig deep and understand where that “yes” point was so I didn’t have to go through as much agony as an adult. [See. “7 Things I Learned from my 8 Greatest Teachers”].

Negotiation is all about boundaries and finding where to put the fence so both neighbors are happy. But when you train yourself to be too eager for the “Yes” then it becomes very hard to put up a boundary where you are saying “No”.

But negotiation is almost as important as sales. By the way, it’s not AS important. Much more important to get the foot in the door (the first “yes”) then have the door slammed in your face. But once the foot is in the door you have to make sure it’s not chopped off. This is negotiation.

So I had to learn negotiation the hard way. In some cases by being out negotiated. In some cases by observing people negotiating on my behalf (which involves more divisions in profits when you can’t negotiate for yourself) and in some cases by having a guy like Brilliant give me some tips which I remembered.

How to Negotiate:

A)     Have more points to discuss than the other side.

Larry said to me that day, “most people in a negotiation think it’s just about the money. If you are selling a product it costs “X”. if you are selling a company, it costs “Y”. But that’s just a small part of a negotiation. Before you sit down for a negotiation make a list of all the things that are important to you. If you are selling a company there’s issues about salary, vacation, how long are you locked up (if it’s a stock deal), who do you report to, what your title is, how long is the employment contract for, how can you get more money if your division becomes more profitable than anyone thought, how your employees will be treated, how will your business expenses be treated, what responsibilities you have, and so on and so on. Really spend time coming up with your list, depending on the negotiation.”

Then, to make his point he reached into his pocket, in the middle of this ancient coin show, and he pulled out a dime and a nickel.

“This way,” he said, “if you have more points to discuss. You can give up the nickels.” He pushed the nickel towards me. “And keep the dimes.”

B)      Have a mathematical formula. In 2007 I was negotiating the sale of my company, Stockpickr.com to thestreet.com. I was negotiating “against” Steve  Elkes, who was previously COO of iVillage and managed to sell ivillage to GE for $500 million where it was never seen or heard from again. [See also, “The Day Stockpickr was Going to Go Out of Business – a Story of Friendship“]

It was only later that I realized how genius Steve was at negotiation when he used this one simple trick. Before we started negotiating he came up with a simple formula that was so simple and made so much sense that it was easy for me to say “yes” as the basis of the negotiation. Only later did I realize what had happened.

He said, “Look, thestreet trades for 20x earnings. So the Board will agree to something half of that so the deal is immediately accretive.” I nodded my head. Made sense. I said, “let’s use next year’s earnings.” He agreed. Seemed simple. Steve said, “So we’ll take all of your ad inventory, take your expected users based on your current growth, use our CPM (cost per thousand impressions) since we will fill up your ad inventory, and then subtract out your expenses, which is really just your salary, and there we have your earnings and we’ll multiply that by 10.”

Simple formula. I nodded my head. He had already used one simple sub-trick against me which is not worth an entire bullet point but worth a mini bullet: “THE BOARD”. So suddenly it wasn’t me negotiating AGAINST Steve – he had an invisible backup in a worst case scenario. He put the element of fear in me. Some mysterious force, “the board” could be erratic or foolhardy at the last minute so he WOULD HELP ME by coming up with this simple formula that the mysterious, and perhaps dangerous, board, would easily agree.

So, the formula sounded like it made total common sense. Particulary since it seemed like he was on my side against “the Board”. I agreed. I immediately started adding up my numbers and thestreet’s CPM was common knowledge in their SEC filings. We agreed to meet in a couple of days while he “researched” what the CPM was and looked at my traffic numbers. All negotiators act dumb at first and as they “increase their knowledge” you inevitably get screwed.

We met again in a couple of days. This time he had the head of ad sales with him. Steve said, “I don’t know all these numbers myself but Tom can explain them.” This is another sub-point, ALWAYS ACT STUPID and defer to experts that everyone agrees is an expert. In other words, you are outsourcing the hard parts of the negotiation so you can remain “friends” with the other side.

Tom said, “The SEC filings say we get a $16 CPM but that’s wrong. We give away a lot of free ad inventory and we have sponsorships on specific sites so you have to subtract that from the $16. It’s really more like a $7 CPM.” Since I had already agreed to the “formula” that was the basis of the negotiation I was stuck trying to figure out if that $7 was real or if he was BS-ing me. But we spent an hour looking at it in every which way and $7 CPM was the number.

So I had to nod my head again.

Then Steve said, “and you really have other expenses: we’ll provide an office, insurance but let’s just focus on your salary as the expenses.” Uh-oh! He was giving me nickels to take the dimes! But he got me to feeling a sigh of relief to set me up for the fall.

“And some of your traffic growth simply comes from us sending you traffic so if we didn’t buy you you wouldn’t have that growth. We would just send that traffic elsewhere. So we have to discount that slightly.”

By this point I was so eager to just agree to anything. I just wanted to plug the right numbers into the formula we had decided on. All the calculations I had been doing on my own went right out the window.

“So I guess the number is X”, he said.

And X it was. Since that’s what the formula spit  out. About 1/3 of what I thought I was going to get but I had agreed to the formula. Touche, Steve.

The good side of that negotiation is that from that point, the entire deal closed in a week. The fastest I’ve ever seen a deal close. So I felt good about that. [See also, “10 Things I Learned from Jim Cramer”]

But the key I learned was:

–          Have everyone agree on a mathematical formula to value an asset or service.

–          Then when you start plugging in the variables, that’s where the real negotiation is occurring and if you know in advance that those numbers are going to be lower than thought, then you will win the negotiation AND everyone will be happy when it’s over. Always key for both sides to be happy at the end but since everything started off on a point of agreement, much easier to keep both sides happy at the end even if there is disappointment along the way.

C)      Alternatives. This is obvious. But pulling it off is often difficult, particularly when you actually don’t have alternatives.  You have to have guts and know how to make the other side feel fear.

In late 1999 I was negotiating with several partners on starting a venture capital firm. The firm was going to be called 212 Ventures.

Investcorp faxed us a term sheet. $100mm to start the fund, a good sized management fee and a good sized performance fee (I actually forget what they were but assume it was the usual 2 and 20), and they would help us raise another $100mm. I immediately got down on my knees, clasped my hands together and started crying while begging to Mark K (then at CSFB, now at DB) “ACCEPT BEFORE THEY CHANGE THEIR MINDS!”

And he, correctly, said, “just hold on a second. I want to spend a few days thinking about this.” We had no other real choices. And having a $200mm VC fund could mean a lot of money per year and in the long run. Having zero VC experience it seemed like a miracle that anyone would offer me this opportunity. I couldn’t sleep that weekend, I so badly wanted to take the offer.

Mark didn’t like the deal. He again used the nickel and dime thing. He wanted us (versus Investcorp) to have more control over how decisions were made, he wanted more expenses paid for by the fund, he wanted a higher performance fee, etc. He had a list of demands much bigger than theirs.

He said to them, “listen, these guys have every private equity fund calling them. Every private equity fund realizes they missed the Silicon Valley boat and now wants in. I can’t stop them from choosing another fund but if you agree to these things, I can get them to agree.” He said again, “every single one of your competitors is calling these guys”. They weren’t but he correctly assumed they wouldn’t fact-check that.

Back to the sub-point from above, he used us as “his board” to scare them and he also scared them with the fact that we were considering alternatives when I was on my knees and praying to god that he would just accept the offer.

Then he ignored them. They tried calling a few times. He didn’t call back. They emailed. He didn’t email back.

They capitulated on every one of his terms. We accepted. The rest of that story didn’t turn out so well. But that’s perhaps the topic for another article.

He used another trick in this: “no news” is actually “bad news” in negotiation. If someone is not responding to you, it means they are likely going to say “no” to you. He used that to his advantage to convince them that we really did have alternatives. So they because eager to capitulate.

If I had been in charge of that and just said an immediate “yes” things would’ve turned out much worse a year or so later when Investcorp was sick and tired of us (of me). [See, “My Worst Decisions as a Venture Capitalist – and 10 Unusual Things I didn’t Know About Google“]

As for Dr. Larry Brilliant, who cured Smallpox in India in the 70s, was Steve Jobs best friend, ran Google.org, and now runs Jeff Skoll’s charitable holdings, and the story of the FBI, “UBL” (as the FBI referred to Osama) and the mystery of UBL’s money, I leave that for another story. This one has gone on long enough.

 

 

 

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  • http://twitter.com/PurviRajani Purvi Rajani

    Great article! Negotiating is one of my favorite things. I even get my friends to let me negotiate car purchases for them. They save a ton of moeny and its fun for me – like playing a game.

    My friend Rob is an expert on personality types and every year he speaks to a meeting of general counsels from big tech firms. He has a great presentation on how the various temperaments negotiate. People with an NT (iNtuitive Thinker) negotiate based on strategy. The way you describe the Brilliant strategy sounds very NT to me (I’m an NT). NFs (intuitive Feelers) value relationships and will approach the negotiation in a way that is intended to preserve or enhance the relationship with the person they’re negotiating with (as well as the people at the organization they are negotiating on behalf of). SJs (Sensing Judgers) value responsibility and want to follow a process. SPs (Sensing Perceivers) usually have a “burning issue” and once that’s settled they’re pretty happy.

    Do you know your MBTI personality James? I sent your book to my friend Rob and we have a hunch. It’s fascinating stuff and a great way to understand oneself as well as the people around you.

    • truzo

      And what are most used/new car dealerships/salespersons as far as MBTI.. i’m guessing SJ

      • mypaisa

        Interesting – I was thinking the successful ones are NFs because they do it every day.

        • http://customresearchpaper.net/ research papers

          good think

  • Ryanwilliam Lees

    i love these kind of posts that relate around business and taken from your experiences!

  • http://twitter.com/socialhotchoco Priscilla Wood

    Engaging post, this was one of my questions for this Thursday. You have the best stories.

  • BrianBalk

    Brilliant – what a great name.  But it sets one up to meet high expectations.  Reminds me of Buckaroo Banzai’s friend, Perfect Tommy.

    • Anonymous

      LOL. I was thinking of Buckaroo Banzai too when James was talking about how awesome Larry’s name is. Dunno why that sprang to mind.

      Now I gotta look up Larry Brilliant.

  • http://twitter.com/socialhotchoco Priscilla Wood

    Interesting, I’m just reading about Groupon and how they turned down Google’s offer of 6 billion$! I would have taken that in a heart beat, they decided to go public instead.

    • Anonymous

      Yeah, I thought that was an interesting decision too. “No, we don’t want your 6 billion dollars, we’d rather you use the massive power of Google to try and crush us.” Makes no sense to me but maybe it will work out for them.

      • http://twitter.com/socialhotchoco Priscilla Wood

        yeah now Groupon is worth 13 billion dollars, so I guess is working out for them. @James: How do you create a business and make it into a multi-billion dollar company in only three years? I mean this is not Facebook or Google, this is just online coupons!

  • http://www.facebook.com/people/Raycen-Raines/1062259953 Raycen Raines

    I felt like I just watched an action movie!
    Thanks.

  • Julian

    Nice post!

    Reminds me of someone telling me how he had to negotiate the sale of some expensive machinery to a mainland China factory decades ago. Chinese are (were?) reputed (not sure it is accurate or deserved) to expect one side to lose in negotiation, while western negotiators are looking for agreements that are a win for both sides.

    So they had this lone guy travel to China and stay there for several days. The client provided a translator, and it began as usual, welcome, factory visit etc. Then negotiation began.

    It took days. Entire days of meetings. The client used every single trick you list and more. He was alone, they were a few in a blind room. They were nitpicking to the extreme, he was constantly on the defensive. They constantly had to validate points with the hierarchy, the government, banks etc. Having every point go both ways through the translator added to the difficulty. On his side, he was backed by his boss and would have conversations with him over the phone, but privacy was not too guaranteed then.

    At some point he could not take it anymore, and went “this is it, I’m done, have a good night” and walked out of the room. Next morning the deal was closed.

  • David Ward

    I read this (or a version of it) a couple of days ago on Techcrunch.  I’ve been working on this deal with a supplier for my company where we have been in some intense negotiations over the past two weeks.  Today I actually applied your nickel and dimes strategy and it worked wonderfully! Thanks James and keep up the great posts!

  • Roy

    Great post as always….I learnt a lot. It came at the right time, especially since a few days ago I had to sell a friends diamond rings to a jeweller and I felt I could get more money for it….even though my friend was happy about it.
    Oh well…lesson learnt.

    But as your article shows….sometimes negotiation involves lying and deception

    Those in my opinion are not what I would consider “worthy” skills to have.

    After all….Karma always comes knocking later ….

    Maybe if we lied less…and deceived less…then our life wouldn’t be so volatile.

  • http://736hundred.tumblr.com/ 736hundred

    I have witness some scary negotiations. The party that I see win, has been the party willing to walk away.

    Another point, I’d make is if you notice a shift in style, or requests, or if other odd players are introduced later rather than earlier, you are up against a group who are hiding something…..In our case, it was a double acquisition ( no one told us until 6 months after the deal didn’t happen)  The company trying to buy us needed our technology to sell their company to their buyer.

    Big generalities, requesting a fast close, any change in due diligence requests – all red flags – and of coarse no communication is very bad news. 

    Great post.  Thanks.

  • Jaba

    Was the ancient coin collection being put on by the ancient aliens? They usually put on some great shows…

  • Anonymous

    well that one worked…

  • Lil Peck

    Reminds me of horse buying. I am not very good at selling them, but I am good at buying them. Buying horses and getting a good deal is a separate set of skills from being good at selling them.

  • Anonymous

    I used to work for a guy who would nitpick every single aspect of a deal and tie his counterparts in knots over minutiae. Then, when all that had been resolved (always to his satisfaction) and he had given the impression that he was ready to close, he would drop a bomb on them. Bigger discount if he was buying, more money if he was selling, whatever. In short, he would get them so deeply involved in the deal that they simply wouldn’t back out at the end. He was a very wealthy man.

    I once went into a negotiation with a guy who I knew would beat me up on price to the exclusion of all else. We went over everything but price, got all the resolved and then when he asked me for the price, I just told him to name his price, that I would accept whatever he offered. Made him mad as hell that I wouldn’t put a price out there. He practically demanded that I give a number and I just kept smiling and reiterating that I would accept whatever he thought was reasonable. Yes, I got the deal and at a very nice price; much more than I would have sold it for.

    • http://736hundred.tumblr.com/ 736hundred

      Yeah, I know a guy just like the first guy you write about, he is wealthy, and that is all he is. 

      I love the second tactic….

      • Anonymous

        Here is what the guy I worked for went on to do: http://www.haan4kids.org/home.html

        Not bad.

        • http://736hundred.tumblr.com/ 736hundred

          That is awesome. I wish more people were like him.

  • http://www.szelhamos.com TheAcsMan

    I’ve always disliked negotiations. Between college and grad school I was an Electrolux salesman. I was great at getting in the door and making the sale, but dreaded closing the deal.

    Years later when I would hire people I would tell them that the salary I offered was all that was available in my budget and that was true. I always offered the full amount budgeted, telling the candidate that if they couldn’t trust me to treat them fairly during this first part of the relationship, why would they have reason to trust me at any time after.

    In my own job jumps I’ve made it clear that I don’t negotiate. Before a figure would be offered I told prospective employers that If the offered salary/perks didn’t meet my expectations, I would thank them for their offer and interest and move on.

    If you deal with rational people, you’ll both be applying Game Theory principles, which makes it so much more likely that you’ll actually arrive at a win-win situation

  • Vishal

    James your writing has greatly improved in this last one year. Your start to the article with an intriguing piece about FBI at your door and in the end keeping that suspense for the next article. With regards to the content, you have written that before as well but overall i enjoyed reading the same thing but in mature James’s writing style.

  • Capitalistic

    Nice post. One thing I’ve realized in negotiations is to keep the other person talking. Sooner or later you’ll figure out what their strengths and weaknesses are – then you fill the void.

  • http://twitter.com/hajak Hampus Jakobsson

    Thanks for a great post! 

  • http://twitter.com/VeehCirra Veeh Waithira

    Wow, I love the use of the “board” …us against them strategy, totally disarming, and since we as humans do not like conflict, we fall for it thinking we are being protected. This is a really insightful point indeed!

    • Patrickm

      Thought I was the only Kenyan in here lol! So U in the states?

      Pat

  • http://twitter.com/VeehCirra Veeh Waithira

    Wow, I love the use of the “board” …us against them strategy, totally
    disarming, and since we as humans do not like conflict, we fall for it
    thinking we are being protected. This is a really insightful point
    indeed!

    • Carol

      I use (some random third party) to make points ALL THE TIME.  Like, “I was discussing this with my business coach, and what he suggested was…” or “My partner said he needs to see X and Y before we can agree”.  It is completely lame that it works, but it works CONSISTENTLY.  Not just to keep yourself on the “good cop” side of the good cop/bad cop fence, but also to cite the expertise of someone else if the person you’re negotiating with doesn’t think much of your expertise in a particular area. Even though I know the trick, it sometimes works when used ON me as well.

  • Mikeh

    “B: Have a mathematical formula” = anchoring from behavioral economics. Go in with a number and put it out there first, because that’s the point where you’ll be negotiating from. The formula idea is a nice derivative of that – puts out the image that you are behaving rationally. 

  • http://Www.brookefarmer.com Brooke Farmer

    I feel like this article has almost as much application to dating as it does to business negotiations. And I like it.

  • http://twitter.com/ThinktoAsk Benji Battle

    I chuckled because I had to admit there are a few times in my normal day that I might point to a higher authority. I use the “Board” all the time. It’s called “my wife.” We negotiate all the time in life, even with our buddies. Sometimes, I use the Board with them (if I don’t want to take my car on the trip, but still want to go, I might say, “my wife is not going for this if I take the car…”). I am not proud of it, but it works. Any husband on here want to lie and say they haven’t done it? lol…

    Benji Battle
    http://www.benjibattle.com

  • Alexander

    I liked that piece of writing very much! Learned a lot. Thanks James and keep up the good work. Greetings from Berlin!

  • brianstacy

    you felt GOOD about closing the deal the fastest as you have ever seen?  when someone is that eager, you got the shit end of the stick.  you left a lot on the table

    • http://stephenrice.eu Stephen Rice

      Yeah, unless you’re expecting something which is absolutely unjustifiable the other side has probably worked out roughly what you’re expecting.

      I generally believe that if the deal was roughly one third of what you expected to get that suggests the other side saved roughly two thirds of what they expected to spend.

  • http://twitter.com/Tynen Robert Sinrud

    You write to much. I need a TL;DR section.