Don't Cede Control: Why You Need To Cut Out Middle Men In Negotiations

Middle Men. Middle People?

They exist in all forms of work and life. They're essential in helping us get our jobs done because they specialize in something we do not. They do a routine task over-and-over again all year long that we do only periodically.

Lawyers. Recruiters. Bankers. Real Estate professionals. PR firms. You name it. And yes, VC's, too.

We need them all. Yet a critical mistake I see many entrepreneurs make is that they hand over too much control to their third-parties. They outsource the critical negotiations and "trust their advisors to handle the details." Middle Men need to be led by you, not the other way around. And a key point is that when it comes down to "negotiations" you need to turn up your personal heat and dial back the middle man.

Let me start with an example. I was recently dealing with a real estate agent on a transaction. We had the final terms of our agreement fairly well boxed in within a range of about 5-7% on price and within 30 days on move-in date. I obviously preferred the lowest price and I wanted the latest move-in date. I told my agent. She told me, "start with the price you want but the move in date he wants."

"That's nuts!" I said. "Why would I do that?"

"Because he told me that he wants the move in date to be X." She then told me that she did this for a living and she knew how to negotiate. Um, excuse me. I negotiate for a living as well. And the thing is, to her this minor "give" is no big deal. To me it's a lot of money. I don't doubt her integrity, I just think we value the outcome differently.

I said, "If I start with your position I have nowhere to go but down. What if he accepts the date and then asks me to compromise on price? I'd rather start where I want to end up and then judge if I want to compromise based on what he comes back with."

She way annoyed.

If you've never read Freakonomics you need to. One thing I learned from the book is that real estate agents always sell their personal property at higher relative prices than their clients' properties. They hold out. They wait for a better offer. They're not in a rush. When they rep you, the marginal cost of them trying to get you a slightly better deal is high for them relative to settling and moving on.

I think for most of us this is intuitive.

I started with a personal example because I'd like you to have that mindset as we discuss the business people in your lives. Remember: they're not bad people, they just don't have the same interests as you do in the outcomes. They're balancing many clients. Small compromises are nothing to them. It's progress.

I had to wait an extra 4 weeks where I might have lost the place. I was willing to wait or move on. In the end I get my exact price and my exact move in date. It just took more time & more risk of losing the deal and waiting for the next one. I was willing. My agent -- not so much.

1. Recruiters:
I have always had close relationships with executive recruitment firms. I value the service they provide. On balance I usually prefer to recruit people from my network both in terms of saving costs as well as hiring people I know & trust. That said, there are times where you need to cast a wider net. Here's what you need to know:

Executive recruiters are great at sourcing candidates. They have a wide set of existing relationships, they have teams of junior staff that cull databases (or increasing pile through LinkedIn), they are skilled in approaching prospective talent and they can "pre sell" your company to get the recruit to the table in the first place. This is the skilled bit that you can't effectively manage.

They're also good at screening candidates. At least the great recruitment firms are. They know what is "market" for your recruits in terms of base, bonus & stock options.

So you finally get down to your short list of final 2 candidates. Or maybe even your final one. Often recruiters want to handle the final negotiations on package and/or do the reference calls. I say NFW.

First, I want to be the person looking my final candidate in the eyes and telling them what the offer is. I want to judge their reaction in person and be able to react on the fly. I know where my pressure points are -- where I'm willing to give in and where I prefer not to. I want to judge whether they're really committed to my company or not.

You can't outsource this to a recruiter. They'll tell you that it's easier for them because the candidate will talk more openly with them. They've done this 1,000 times. Yeah, that's what my real estate agent told me, too. You're the guy. Have the discussion yourself. Trust your "Blink" instincts.

I'm also reluctant to hand over reference calling. I know that no recruiter will agree with me on this point, but I'll tell you that I'm certain there's a positive bias in reference calls. They're on the final candidate. They want to close down the search. They want to place this person. They're not going to ignore negative feedback, I'm not questioning their ethics. But I doubt they'll dig in as deep as you will in the reference checks. I doubt they'd be willing to press harder in questioning and/or be more attuned to negative signals that the reference might be implying but not actually saying.

One tip -- depending on seniority -- you can sometimes hire independent reference check firms. It can get expensive so you'd probably only do it for a very senior hire. But I've found it to be invaluable. They ask really tough questions that I have a harder time asking. The reason it's harder for me is that I know whatever I ask is going to get back to my candidate. Unfortunately that's how reference checking works.

With an independent person they ask anything they want I canapologizeon their behalf. Trust me, you learn a lot more that way. VCs often do this forreferencechecking.

2. Lawyers:
So you got your big term sheet signed and you're now in the drafting. You thought it was going to be as easy as just having term sheet transferred to a longer form document. But as it goes to the legal docs naturally 20 issues arise the require negotiations. You want the deal to close in 4 weeks. But every freakin' week there are delays in getting the lawyers to "turn around" the documents.

Their lawyers blame yours. Your lawyers blame theirs. This seems to happen on every deal I ever work on.

Here's the reality. Sometimes the problem is that one of the sets of lawyers has too many deals on the table and just doesn't process your documents quickly enough. Trust me, that happens. Other times it's a matter of the other lawyers waiting for feedback from their client who hasn't had time to process the issues. So much freakin' time gets lost in the back-and-forth.

And then there's the madness. Lawyers insist on arguing with each other like sports. They have their "lawyer points" that they really care about and believe you should be passionate about as well. It's their job. I call it "arguing over semi colons and periods (full stops to you Brits)."

Do you want to get the deal done faster? There's one way -- even though everybody is going to try and resist. Get everybody in the same room for a multi-hour "drafting session." By everybody I mean your lawyers, theirs and the VCs or whoever the client is (maybe a company acquiring you). That's the only way to work through all of the issues in a timely manner.

Why do they not want to commit to being together? I'm guessing it's less efficient for them. They have to suck up all those hours for just one client and in a large block. If they do it asynchronously they can deal with it when they have time to get around to it -- often late in the evening. If for some reason your deal fall through -- remember that "Time is the Enemy of All Deals" -- it's not the end of the world to them. It might be to you. Your incentives for speed aren't aligned.

In the same room, when "lawyerly" issues crop up you and the counter-party can take commercial judgments on where you want to compromise. In the same room, clients can't "hide behind their lawyers" by saying "it wasn't me asking for that." You problem solve. Everybody is in the room to hear the issues.

Shit gets done.

Don't let lawyers toss the ball back-and-forth. Cut out the middle man. Negotiate directly with your VC or acquirer with lawyers present in the room.

3. VCs:
VCs are often on your side and usually act in an ethical manner. Same as other middle men. But when hard stuff comes up at your company you want to be the principal in the negotiations. If you're raising your B round, you'll likely get huge benefit from your A round investor helping with introductions. But when it comes time to negotiating the term sheets or determining which investor group to accept -- you want to be the principal in that negotiation. No "back room deal."

When you want to sell your company one day -- the same rule applies. You can sometimes leverage your VC in a "bad cop" negotiation with a buyer. You can certainly get coaching from your VC on how to play the negotiations since they do it more often than you do. I'm not saying to not trust your VC (in the same way I'm not saying don't trust your recruiter or real estate broker). But you want to be the person negotiating your deal.

What might the VC do against your interest? For one, due to the way liquidation preference work sometimes they have "flat spots" which means that they might earn the exact same amount from a $40 million sale as they would from a $50 million sale. They might make this clear to the buyer.

The opposite might be true. You might be willing to sell for $40 million but your VC might be telling them $50 million or nothing. It happens.

As a VC I don't necessarily want to cede 100% of the control to you, either. I have investment money at stake so I'm a principal in the negotiation, too.

Why do I care? Because many buyers try to skew deals so that they pay more in future incentives to employees than in purchase price for the company in order to reduce the return to investors and maximize the management lock in. I understand that thinking. But my duty is to maximize returns for my shareholders.

We're both principals in a sale. If you trust your VC then hopefully they'll help represent your interests and be transparent with you about what the key issues are and when your incentives aren't aligned. I'm pretty explicit with my portfolio companies because I've been burned on the other side of the table. But just remember, you're your own principal. Don't cede complete control to your VC because "they're the expert" or "they have a long-standing relationship with the buyer."

4. Bankers & PR:
I think you get the point so I'll make the last two brief. Bankers & PR firms have multiple clients. They also have to deal with the buyer or the journalists on a regular basis for a long time. So they're less likely to push things to the line as you would be. It's back to incentives like real estate agents in Freakonomics. They want you to succeed. But they play a multi company, multi-year strategy.

So they'll think more about their long-term relationship with the corp dev team at the buyer than you might. They'll think about what other deals they're shopping them and balance all of their clients interests. So while you definitely want their help in discussing price and getting you more information (they're better at it than you), I want a seat at the table. As an entrepreneur I have one company to sell. And possibly just one time. For them, this is just a deal.

PR firms are the same. Highly ethical. Very customer focused. But when they're trying to get David Pogue, Walt Mossberg or Kara Swisher to write a story for you, they're also thinking about their other clients -- now and in the future. The good side is that because they have many clients over a long period of time they can get you far more access to the journalists than you could get. Same with bankers and corp dev groups.

But when it comes time for my story, I want to pitch it. I want to decide what the right "angle" on the story it (with their input, of course). I want to decide if I give an exclusive or not. I want to control my outcomes.

Summary:
In dealing with middle men you get the huge expertise they bring to bear by doing their task on a repeated basis and dealing with the same sets of end customers. I not only encourage this, but I've spent my career fostering these important relationships.

At critical moments in negotiations your interests diverge in ways that even your service provider doesn't realize and probably doesn'tacknowledgeto themselves. What real estate agent do you know who actually thinks he or she sells you short. The data says otherwise.

You have an interest in pursuing the absolute best outcome you can get. Often others have an interest in pursuing the best possible outcome they can get, without sinking in extra time, without risking ruffling feathers and without breaking conventions & norms.

Reprinted from Both Sides of the Table

Mark Suster is a 2x entrepreneur who has gone to the Dark Side of VC. He joined GRP Partners in 2007 as a General Partner after selling his company to Salesforce.com. He focuses on early-stage technology companies. Follow him at twitter.com/msuster.

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1 Comments

  • David Kaiser, PhD

    Good points, and good clear analysis of the issue. Thanks, coming form someone who is inclined to punt the details to the pros. I'll be sure not to do that in the future.

    David Kaiser, PhD
    Sacred Productivity Coach
    www.DarkMatterConsulting.com