Thanks to aspiring entrepreneur Christoph von Herrath for posing these questions in our mentoring session last week. Christoph and I were matched by the mentoring programme of Student Incubator Vali Berlin.
Thanks to aspiring entrepreneur Christoph von Herrath for posing these questions to me in our mentoring session (made possible thanks to student incubator Vali Berlin) last week, and his feedback on this text.
The world is set against start-ups on every level except one: creativity and the innovation it produces. Established firms enjoy superior resources, branding, information, capital, and talent. Startups are driven by the new.
By their nature, new things lack norms, procedures, and expectations. In other words, they lack an established structure. The less structure which two parties bring to a negotiation, the greater the range for possible divergence in expectations: there’s more to lose or gain when two people negotiate from wildly differing starting points, with fewer references in common.
This is true of evaluating the value of startups themselves during investment negotiations. In recognition of this fact, entrepreneurs frequently avoid negotiating a particular value, and instead use ’convertible’ agreements which defer setting share price value until a later investment round.
Everything is negotiable
Compared to roles in established organisations, startup leaders also have a broader scope of things to negotiate. For starters: hiring, pricing, compliance, organisational culture, and their own compensation. Later on, you’ll have dedicated staff for different functions who specialise in knowing and applying industry norms and best practices. But in the first few years negotiation of most everything falls within the purview of the founding team. Serious negotiation missteps could make or break the venture.
As well as bartering everything from catering to legal fees, entrepreneurs must often fall back on negotiation skills to obtain critical items with reduced or waived payment. Take building an MVP as an example: top expertise usually costs money which unfunded firms do not have. Negotiating influence, status, equity, or delayed payment is often necessary to assemble and motivate the initial team. Hosting, accommodation, marketing, logistics: these are all areas ripe for creative negotiation in lieu of adequate cash for payment.
Every touchpoint with customers, suppliers, and partners (to name a few) is an opportunity to creatively identify, request, and negotiate something the business needs. If you’re selling something they’re not buying, could they refer other leads to you? Could you do the same for them? What about sharing marketing costs at an industry event? Syndicate your blog? Promote their service? Exchange market research? Refer you to industry experts? With an open mind, overlapping interests and resources can often be found. Semi-structured brainstorming is a valuable technique for exposing such opportunities.
Pricing, in particular, presents a high stakes challenge: the more innovative a product is, the more difficult it is to estimate its value, and what percentage of that value can be captured by its creators. This is especially true of market-makers, where no direct references exist. Academic research provides little practical advice. One-to-one negotiations with early adopters and Industry insiders is typically required to discover the range of plausible prices, and pick a point from which to begin experimentation.
Push too little and you leave much-needed Capital on the table, and likely set a precedent resulting in compound losses. Push too hard, and risk alienating that critical support base upon which you rely for initial revenue. The pressure on good pricing, and discomfort around researching it, leads many startups to avoid early price negotiation, which increases their risk of failure and deprives them of resources – “leaving money on the table”.
Types of negotiation skills
For many people, the concept of negotiation involves manipulation or dishonesty, and is therefore awkward and avoided. MBA programmes often teach students rational models for achieving the best outcome for both negotiating parties, which validates and justifies negotiation as a mutually beneficial activity to those with negative preconceptions. Understanding the difference between distributive negotiation, where a fixed amount of value is divided up between parties, and integrative negotiation, where different sources of value are creatively combined, is useful and important.
Combined with a briefing on biases which affect negotiation details, and practical ways to structure negotiation starting and final bids, this is where negotiation classes typically end. These rational negotiation skills are very valuable, however there are at least two other critical components to negotiating something new.
Your relationship with yourself is one of the most important and overlooked components of negotiation. Your internal identity, self-control, and self-confidence affect all communication with other people before a single word is spoken. It is well established that many unconscious human behaviours signal our state of mind, including stress, interest, and confidence, such as pupil dilation, breathing depth and frequency, and facial micro-expressions. It is virtually impossible to fake these parts of our inner life.
In addition your ethics determine how creative you are prepared to get, and how comfortable you will be with the other parties behaviour – what you expect of them, and of yourself.
Interpersonal skills include broader emotional intelligence skills like empathy and conflict management, as well as learned awareness of particular cultures and their norms. This is also the territory which gives negotiation a bad name: influence is part of this group of skills and plays a major role in negotiation outcomes, irrespective of hard facts and rational engagement.
Sales training books abound, offering everything from rhetorical argumentation, to emotional role play, to hypnotism. Understanding techniques of influence is important, at least for defending yourself against effective tactics used by your negotiating partners. Beyond defense, building rapport during negotiations through more and less subtle means of influence is viable and common practice – a skill you can develop and use when you feel appropriate.
These skills combined
Self-confidence determines speed of rationalisation, and ease of rapport. Cultural awareness informs you of opportunities for integrative negotiating. Past success, for any reason, should boost your self-confidence to succeed again. As such the different types of negotiation skills which I have outlined feed into each other and are combined fluently and usually subconsciously in successful negotiations.
For a rounded education on entrepreneurial negotiation combine academic research and popular business literature. Figure out the parts you’re comfortable with and push yourself to try them. Good luck!
- Getting to Yes https://en.wikipedia.org/wiki/Getting_to_Yes
- Harvard negotiation skills https://www.pon.harvard.edu/category/daily/negotiation-skills-daily/
- Essentials of Organizational Behavior, pp 136 https://www.stuvia.com/book/essentials-of-organizational-behavior-global-edition/9781292090078
- Self-Efficacy: The Exercise of Control (Bandura) https://www.goodreads.com/book/show/882815.Self_Efficacy
- Influence (Caldini) https://www.goodreads.com/book/show/28815.Influence
- The art of manipulation (Sparkman) https://www.goodreads.com/book/show/6963194-art-of-manipulation