Four Factors for Successful Entrepreneurial Negotiations

If you can’t negotiate, you can’t be a successful entrepreneur.

As Howard H. Stevenson, long-time business scholar has said, entrepreneurship is “the pursuit of opportunity beyond resources controlled.” That means that no matter what the sector, entrepreneurship requires convincing others—your startup co-founders, angel investors, venture capitalists, employees, and potential business partners—to commit their knowledge, time, reputation, expertise, and money to your idea.

The Power of Persuasion
You must convince your negotiation partners that it’s in their best interests to do what you want, when you want, the way you want. You must also be able to listen and improvise so that you can refine, or even overhaul, your ideas in light of others’ needs and contributions.

But how do you accomplish such feats? In my new online MIT Professional Education course, Entrepreneurial Negotiations: The MIT Way, I explore how to address four key factors to successfully manage entrepreneurial negotiations.

Key Factor #1: Ego and Emotion
People tend to become attached to things they invent or create, so they’re often protective of them. They’re proud of what they’ve produced, and they’ve got their own notions about the best way to take those ideas to market They’re likely to become upset if others appear to downplay their products’ value. For that reason, entrepreneurial negotiations usually involve some degree of defensiveness on the part of the proposer or creator.

On the other side, negotiators, such as investors, tend to have healthy skepticism about any investor’s claims. After all, it’s no secret that many new businesses and new ideas fail.

Put these two mindsets together, and talks are likely to be bumpy, perhaps even escalating into increasingly bold claims on one side and strengthening skepticism on the other. Not surprisingly, such interactions can lead to bruised egos at the negotiating table.

Why does this happen? Psychologist Lee D. Ross, a professor at Stanford University, has identified an important cognitive bias that applies in these situations: reactive devaluation. It causes all of us to automatically question the legitimacy of anything proposed by a negotiating partner. Inventors are inclined to mistrust statements made by the other side about their inventions. Meanwhile, investors or business partners almost always start out skeptical about investors’ claims. However, several strategies and techniques—including the use of intermediaries trusted by both sides—can counteract reactive devaluation and other emotional and cognitive dynamics.

Key Factor #2: Technical Complexity
Many startups are built around a technical insight or design. These may involve innovative hardware or software, a complicated new application of old tools to solve a tricky problem, or the opportunity to capture an untapped market segment. Potential investors or business partners rarely have the same expertise as the inventors with whom they’re negotiating. That’s why investors often rely on experts of their own to test and vet whatever is being proposed. Asymmetries in technical understanding and the involvement of skeptical experts working for the other side can create difficulties.

For example, experts selected by an investor or potential business partner may represent a particular school of thought on a technical matter that makes them skeptical about whatever the entrepreneur is proposing. When that happens, the inventor has to work especially hard to win over the other side’s expert. Moreover, even in the face of a great idea, an investor’s technical expert might remain skeptical, just to prove his or her worth, reflecting more of a bias than an objective evaluation of what’s being proposed. In such situations, the entrepreneur will end up negotiating not only with the investor, but also, indirectly, with what we call the investor’s or partner’s “back table” —the real decision makers to whom the negotiating agent reports.

To negotiate with a back table (even indirectly), entrepreneurs must find ways to ensure that their claims about their product or services, based on their own technical or scientific tests, are convincing. Entrepreneurs know the strengths and weaknesses of those tests inside and out. But unfortunately, given typical negotiation dynamics, their research may fail to persuade a back table for the reasons previously mentioned. By using a “joint fact-finding” approach, entrepreneurs and investors may be able to overcome this obstacle.

Key Factor #3: Uncertainty
Entrepreneurship turns on innovation, yet innovation is ripe with uncertainty. The usual argument in favor of something innovative is that no one has ever tried it before. An argument against it is also that no one has ever tried it before. All this uncertainty creates both risk and opportunity. Both perspectives are magnified by increasing technical complexity in ever-changing markets and quickly shifting business environments.

Especially at a startup, reasonable minds can disagree about how to manage uncertainty. Experimentation and creativity help, of course. But in negotiations, investors and entrepreneurs sometimes turn to another tool to resolve their different estimations of what is likely to happen. Instead of trying to negotiate agreements based on whose forecast is more likely to be correct—e.g., how fast the user base will grow, how soon the company will become profitable, when the next round of funding might arrive, how fast the company will be able to scale up its presence or production—the parties can use “contingent agreements.” These agreements bridge competing forecasts by spelling out what both sides agree should happen, regardless of which scenario might be correct.

Key Factor #4: Relationships
When typical buy-sell negotiations conclude, the parties hope they never have to see each other again. Entrepreneurial negotiations, however, often require ongoing relationships. Founders must keep up communications with venture capitalists; managers need to keep talking to their boards of directors. Once negotiators have worked together for a while, they may part company; until then, though, they’re best off behaving as though they will have to continue to work together.

There are ways negotiators should—and should not—behave when they expect extended interactions with their negotiating partners. First, long-term relationships hinge on trust, and trust depends on truthfulness—so negotiators should always default to honesty. Second, when relationships matter, negotiators should avoid win-lose deals that eventually leave the people on one side realizing they didn’t get a fair shake. The alternative is a win-win outcome that benefits everyone, or that at least leaves all parties better off than they would be with any other proposed deal. That’s more likely to happen if both sides commit to creating enough value to go around.

Turning Theory into Action
While entrepreneurial negotiations present many challenges, there are also plenty of ways to overcome them. To learn in depth about the most effective strategies, tools, and techniques, join me in my new online MIT Professional Education course, Entrepreneurial Negotiations: The MIT Way, which begins on April 26, 2016. This six-week course is designed to help inventors, investors, and potential start-up partners understand entrepreneurial negotiation theory, turn it into action, and, ultimately, transform entrepreneurial ideas into reality.

Professor Lawrence Susskind, Ford Professor and head of the Director of the Science Impact Collaborative, has explored the theory and practice of negotiation and dispute resolution for more than 40 years. He co-founded the interuniversity Program on Negotiation (PON) at Harvard Law School, where he serves as vice chair and co-directs PON’s Negotiation Pedagogy Initiative. In addition to serving as an advisor to Fortune 100 companies, he has authored or co-authored 20 books including “Good for You, Great for Me: Finding the Trading Zone and Winning at Win-Win Negotiation” (PublicAffairs, 2014).