How to Size Up a Negotiation

by Anthony K. Tjan  |   11:14 AM February 18, 2010

In one of my posts last year, I shared a framework for more effective negotiations. The first step of the framework described the need for pre-negotiation homework with an emphasis on understanding the specific interests and positions of the opposing side. Making a list of these points is the right starting place as it helps show where the biggest gaps might be.

The next step is to quantify the value of each negotiation point and of the negotiation in its entirety. While this seems obvious, it is not done as often as it should be. In most negotiations, people enter with pre-determined positions and then in the process allow emotion to override logic. Having the discipline to assess and quantify the facts beforehand helps one to maintain rationality and perspective.

Here is a quick look at how best to quantify a negotiation:

1. Understand the big picture price / value you are trying to achieve
2. Determine which of the negotiation points are quantifiable
3. Bound the low and high values of each point
4. Create scenarios for both “edge cases” which might be of concern and for “likely scenarios”
5. Re-prioritize negotiation points
6. Aggregate quantifiable points to see how they compare to the big picture you are trying to achieve

The big picture of the negotiation is critical to quantify. I’ll talk more about the relative importance of this from the buy and sell side in a separate post, but for now it is sufficient to say that the most important number to remember is the total number you are trying to achieve. In the course of a negotiation many people end up negotiating on a point-by-point basis and without remembering the real value of any given point in the context of the broader ultimate goal. Making efforts to quantify the spread in a deal makes the negotiation much easier and can even eliminate points of negotiation. Let me illustrate with an example:

I will always remember an intense negotiation between two sets of lawyers about the best tax treatment for a business that I was selling. After some three hours on the phone with legal counsel, I asked if anyone had quantified the differences between each proposed tax treatment. Everyone understood there were different ways to treat the situation, but no one had quantified the difference. It turned out that the likely savings resulting from choosing one tax treatment over the other would be a nominal compared with the price of the legal and tax work required to maximize the benefit,, and it was negligible to the total deal. Any one of the tax proposals would have been fine. As I pointed out bluntly to the folks on the phone, the cost of them bringing up this point and then working on it was greater than anything I might have saved — it was a waste of time. .

With the big picture understood, set low and high values for each negotiation point and develop some scenarios. You then need to try and understand these points in their full context and be careful in how you trade them off against the overall goal. Another mundane example helps illustrate: Let’s say you were looking at a vacation package and the car transfer price range you researched in the market was a low of $50 and a high of $200. Let’s assume that your total goal of all the vacation components was $1500. If you subsequently learned that the car transfers as part of your package were an outrageous $200 per transfer (and you could have had equivalent transport for say $50 per transfer), should you really care if the total trip was a good deal?

Scenarios help put a reality check on the negotiation. In our venture capital business, a lot of the negotiation does not really matter unless there is something really bad that happens or something really good. Often while you are doing a deal it feels like you are negotiating both a pre-nup and a pre-agreement to how you’ll share winnings if you hit the jackpot. It helps to outline scenarios to see how meaningful certain deal points really are. For example, in early stage ventures, founders and investors often spend a lot of time and discussion on the pre-money valuation. You can learn a lot about what someone is really thinking by quantifying a few scenarios and with that proposing the appropriate one to the opposing side. For example, an entrepreneur who argues hard against giving an investor the “first money out” suggests that he is not as confident as he should be about the eventual liquidity event (because it should theoretically be much higher than then money invested). Similar to bounding individual negotiation terms with low and high ranges, it makes a lot of sense to try and roll the movie forward to see how low, medium, or high cases might play out.

For our own deals, we estimate what the company really needs in terms of capital and what we need to subsequently believe for our investment to achieve say2x, 3x, 5x, and 10x our money. I am continually reminded in doing this exercise that even critical terms such as valuation often matter less than one believes they do in several scenarios. By now the common theme should be obvious: quantify, analyze, and prioritize key points, but always focus more on winning in aggregate. Sizing up your negotiation before it starts and periodically during the negotiation will help you understand what it really means to win.

More blog posts by Anthony K. Tjan

More on: Entrepreneurship, Negotiating, Venture capital

ANTHONY K. TJAN

Anthony Tjan is CEO, Managing Partner and Founder of the venture capital firm Cue Ball, vice chairman of the advisory firm Parthenon, and co-author of the New York Timesbestseller Heart, Smarts, Guts, and Luck (HBR Press, 2012).