T. Randolph Catanese, Esq. © 1999. All Rights Reserved.
The first segment in this series discussed why it is important to prepare for any negotiation. If you, the entrepreneur, wish to conclude a successful negotiation, then it behooves you to prepare for it. The better prepared you are, the more likely you will end up with a satisfactory and successful negotiation.
As was discussed previously, when preparing for a negotiation the entrepreneur should identify their core goals, significant goals and discretionary goals. Once these goals are identified, a situational analysis should occur in anticipation of the negotiation. What follows is a case study of how this would occur.
Let’s say that you (the budding entrepreneur) want to start up an internet-based company. You have a great and novel idea, but you do not have the technical prowess to implement the idea into an internet site. To make matters worse, you need to raise $100,000.00 to get the project off the ground. Your best friend has told you he has a friend named Bubba who just came out of a high-powered internet programming firm looking to start his own independent programming company. Your Uncle Milt has told you that he has a long-time business associate named Gecko who is looking to invest in start-up internet companies. Thereafter, you meet with Bubba and Gecko and flesh out with each of them how you could work together in moving forward with your idea and your company. Both have indicated to you that they are willing to work with you, but they want you to present to them a proposal.
During the meeting with Bubba he explains that because he is starting up a new business he cannot afford to work entirely for a piece of equity in your company. But, he explains he would work for partial equity and partial cash. He further advises you that his initial bid for the work to be performed will probably be $25,000.00 and of that he needs at least $15,000.00 paid in advance before he will do the work and the other $10,000.00 he is willing to take in stock. While he’s explaining this to you you’re thinking that you don’t know him that well and you want to be sure there are performance criteria in place for him as a programmer. Further, you think to yourself that you would like him to start for $5,000.00 and be paid progress payments of $5,000.00 each until a maximum of $15,000.00 with the other $10,000.00 payable in equity stock in the company.
When you meet with Gecko he explains to you that he is willing to invest $100,000.00, but does not want to do it in one lump sum. He would prefer to give you $25,000.00 which he understands is the amount you need to pay Bubba and is willing to give you $10,000.00 more to cover the immediate overhead items to start your new business. But the balance of the money he would prefer to put in later once he knows the business is off the ground and running. While he is telling this to you you’re thinking that you want all of the money now and you do not want to wait for it, because you have heard horror stories about investors not fulfilling their investment commitment and leaving the start-up without necessary working capital. You want to be sure that he invests all of the money up front before you take dollar one from him.
Given the above illustration, what are the core, significant and discretionary goals for the entrepreneur? As to Bubba, core goals would be - to lock him up as a programmer and make sure he is available, to pay him progress payments as he performs the work, and to have the option to give him equity in exchange for the final payment of $10,000.00. Significant goals would be when Bubba will start the project and the depth of the project. Discretionary goals would be obtaining the option to either pay Bubba in cash or in equity at the end of the contract or have the right to buy the stock back from Bubba at a later time once the company is off the ground and moving forward. With regard to Gecko, the core goal is getting the $100,000.00 paid all at once. A significant goal is giving Gecko the least amount of equity in exchange for the investment. Another significant goal would be to have Gecko on the board of directors for the company since his business experience would be beneficial. A discretionary goal with Gecko would be his commitment to make a further investment into the company as the company grows.
Most transactions, for obvious reasons, will be much more complex and difficult than this illustration. But the principle is always the same - identify the core, significant and discretionary goals and then map out a plan on how to get the agreement done. Otherwise, especially in light of the complexity of deals occurring today, you as the entrepreneur may lose a deal for lack of preparation. Therefore it’s high priority to have some expert like a business dispute lawyer to guide you so that you can achieve a successful negotiation.
Look for the next two segments which will address how and when to confirm an agreement which follows a successful negotiation.