Negotiations Part 3: How to Conduct the Initial Negotiation

The start of a negotiation often is that the parties produce a paper with their positions. If it’s not a formal paper for negotiations, at a minimum you should write a term sheet like “Document to Discuss.” Here’s the single biggest mistake people make: they negotiate piecemeal. The reason you make this mistake is you work through the document and try to negotiate each point as it comes up. The best way to handle this is to learn from lawyers; lawyers understand how not to negotiate piecemeal. Lawyers always start from a position of, let me hear what all of your points are first before we come back. Because lawyers are used to drafting documents, they hear all your points and come back with a comprehensive written response.

The reason you don’t want to negotiate piecemeal is that if you start negotiating point by point, there may be more substantive points to weigh in on. So even when you’re discussing it verbally, the way to response is listen to the other side as they explain each individual issue, and simply say out loud to them “listen, I’m not going to respond to each point, I just want to hear what all your points are first.”

I like to set expectations in a negotiation; the basis of a negotiation is that neither side is going to get exactly what they want. But if we each make appropriate compromises, we both should get what we need and it should be win-win. Another common mistake in negotiations is assuming that everything needs to be 50-50; people call it for some reason ‘splitting the baby.’ What I tell people is when you learn all the points that the other side cares about, ask them what is most important, and listen.

No negotiations happen without some amount of compromise, so you need to be thoughtful about that before you start. You simply have to create some padding; some things you know you’ll be able to give in on when the negotiations start. If you don’t give in on anything, you won’t seem reasonable, so with padding it’s easier to give in on some points. And of course, if there’s asymmetric power, one side will have to give more than the other, but also be aware that even with padding there’s chances you’ll have to make some tough choices about what you compromise on.

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Mark gave this discussion on 4/30/16 on Snapchat. If you want to watch more content like this when it breaks, follow him on the ghost:  https://www.snapchat.com/add/msuster.

Negotiations Part 2: How to get a negotiation started

If you listen to most people’s advice on negotiations, they’ll tell you that it’s always the other side that should start first – the problem is, that’s wrong. The reason that people tell you the other side should go first is that often you see their cards played first before you have to play yours. What this means is perhaps they’re willing to give you a lot more than you thought you were going to get. The feeling is that if you go first you may actually narrow the scope of your negotiation. And the truth is this is actually partially true, but only partially – it’s the most critical thing that people get wrong in negotiation.

When you negotiate with another party, you have to understand the other side’s approval process. People aren’t going to throw out commercial terms in a negotiation without having the budget authority or approval of someone more senior or in different departments. So a really important technique that I like to use in a negotiation is called anchoring – anchoring is the most important thing in a negotiation.

Let me give you an example through M&A. Let’s say you want to sell your company and you want to negotiate with a prospective buyer. If that buyer goes to his/her senior people and requests of purchase price of, say, $50M, once they’ve gone for approval for that it’s incredibly hard for them to go back and say “we got it wrong, it’s actually $80M,” because it ruins their credibility.

Anchoring is the process by which you give guidance to a range without naming a number. In this case, you might say “our post money and our last money was at $30M post, and we know VCs expect 3-5x their money. We think in our company, they want 5x, but they’re probably willing to settle at more towards the 3x. Even though they’re going to push us higher, as management we really want to work with you, so we think we have some leverage to get it into that general range.”

So you really just told the buyer that the expectation is that it will be between $90-150M, but you didn’t actually name those prices. The important thing about anchoring is to have a range, but also to have a rationale and justification. Any savvy buyer will pick up on these signals – they may ask for clarification – but at least they know the range of expectations.

Or, let’s say you’re negotiating with someone about to join your company, and you want to pay them $120k/year. If as the founder you’re paying yourself below market, you might start by saying “look, I’m payed $80k, I know I’m payed less than market. We’re an early stage company and cash is king right now, so we’re really trying to keep cash comp down. At the director level, our options packages run from about 0.25-0.4% depending on your cash package.”

After you anchor, it’s your job to listen. You want to get feedback, and you want to do it eyeball-to-eyeball. This is why in the case of recruiting you should never have the recruiting agency discuss the package with the candidate, even though they’ll tell you that they should. If you anchor at 120 by pointing out that you only get paid 80, and they say there is no way they can get payed less than 120, at least you know their expectations in the negotiation. Negotiations are all about testing assumptions and finding out what’s important to the other side.

Back to the starting place, once you’ve anchored, you do want the other side to take the first move.

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Mark gave this discussion on 4/29/16 on Snapchat. If you want to watch more content like this when it breaks, follow him on the ghost:  https://www.snapchat.com/add/msuster.

Negotiations Part 1

The start of any negotiation is you creating an inventory of all the things that really matter to you – start with an inventory. I know it sounds basic but I’ve done negotiations for a long time, and people seldom create this inventory. Obviously you want to stack rank your requirements of things that are absolutely critical, things you’d like to have, and things to throw away.

The second thing you want to do is create a list of all the people on the opposing side who you think will be part of the negotiation. The weird thing to me is that many people start negotiations without thinking about who is pulling the strings from the other side. In negotiations there are principals and agents – agents are people who negotiate on behalf of principals. If you only deal with agents, you’re in trouble because you’re not going to move things as quickly or have as much impact as you’d like to have.

The next thing you want to do is to create an inventory of what you think the other party wants. Now here’s a key: you also need to inventory what you believe are the motivations of the other side. Everybody always assumes that money is the only driver; in negotiations money matters, but it’s not the only driver. Sometimes buyers or negotiators want to make a name for themselves. Sometimes buyers or negotiators are risk averse, and their negotiation is about CYA (cover your ass). Whatever the motivators are, if you don’t understand them you’re not going to be an effective negotiator.

So many things are in negotiations, and so few people do enough to prepare. For example, recruiting is a critical area that all startups engage with on negotiations. Before you start, you need to know the art of the possible on your side – salary, options, severance, benefits, etc. You want to collect as much information as possible on your side about how much their previous comp was in terms of options, salary, benefits. Are they risk averse or not? Do they have kids, a family, a house payment? If you’re asking them to leave a job, they may be more interested in severance because they view that they may be taking a risk to join you. If they’re already unemployed or between jobs you can assume that’s less of a driver because they’re not leaving something to join you. So I try to make this mental inventory of what I believe the other side wants before every negotiation.

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Mark gave this discussion on 4/28/16 on Snapchat. If you want to watch more content like this when it breaks, follow him on the ghost:  https://www.snapchat.com/add/msuster.

Sales Part 7: Arming and Aiming Sales

When you first start a company and you’re doing all the sales yourself, you develop something called tacit knowledge. Tacit knowledge means that through the experiences you have sitting with clients, you learn on your own how to sell. As you start to grow out a sales organization, many founders take for granted that the people they hire have this tacit knowledge. In reality, many of them will fail when you put them in front of clients because they are not used to the objections they’ll get, and competitive reviews, and so forth.

So this is what I mean by arming. You have to arm them with materials that will help them succeed. What you want to do is drive people from tacit knowledge to learned knowledge, through something called sales enablement. Stating the obvious, the first part of sales enablement is a pitch deck. You have to develop a pitch deck to help people position sales. But the pitch decks on their own are not good enough; you need ride alongs, and video and audio training with the pitch deck. When you go do client visits with your sales reps, they hear how you position the pitch deck and respond to questions, and they will emulate you. The best sales orgs actually record this, either in video or audio or both, so people who are getting up to speed can actually listen to it.

A third part of sales enablement is an ROI calculator. It starts with a simple spreadsheet that helps with economic selling points. A critical component is competitor matchups. You’re going to be asked on a regular basis about competition; they need to know how to compete against them. I promise you, nobody buys without wanting to check out the competition. Even if they like you, they still need to check out the competition; that’s what people do. Sales enablement leads to credentialing. You actually need to test people and make sure they have sufficient knowledge to be on the road.

Now I want to talk about why aiming is so critical. Aiming is about helping your sales reps figure out which accounts they need to focus on. People who are inexperienced at leading sales teams will get frustrated when they look at the sales reports and they see accounts that just aren’t making progress or moving along. That’s because sales reps generally don’t want to tell you that their sales aren’t making progress; they’d rather just leave more pipeline; it makes them look better and they have less heat. But management knows the golden rule of sales is qualify, qualify, qualify.

Even if you don’t have a huge org, you want to give people territories, split by either geography, industry, size of account, or some other measure. It doesn’t matter if you don’t assign all the accounts out. What you’re really looking for is accountability and focus. I even like when you go after bigger accounts to actually have named accounts per reps, and they can only focus on their names. However you dole out assignments, you eventually want to bucket your leads into As, Bs, and Cs.

An A is a deal that your rep is telling you can close in the next 30-60 days. This is their near term focus. Bs are deals that could close this quarter or may just bump into the first month of next quarter, and obviously Cs are the ones that are not going to close in a quarter. Your job is to get hyper focused around the As. How can you help them close the As, and constantly test whether they’re making progress. The Bs of course can get some of your sales reps’ focus, but you want to make sure they aren’t getting disproportionate focus relative to the near term close. And of course, Cs need to get taken away from them. Cs go over to marketing. Marketing owns what are called tick-alert campaigns. It’s about constantly putting information in front of those accounts to determine whether or not they can become a near term buyer.

Of course, the objective of marketing is to keep stuffing more stuff into the sales funnel, but only after it’s qualified as having budget and a near term need. Of course, reps will resist all of this. They don’t want accounts taken from them. They want a broad base of accounts to focus on. Your goal in all of this is to focus on something really important, which is sales efficiency.

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Mark gave this discussion on 4/27/16 on Snapchat. If you want to watch more content like this when it breaks, follow him on the ghost:  https://www.snapchat.com/add/msuster.

Sales Part 6: How Much Professional Service You Should Do as a Saas Company

The conventional wisdom that VCs will tell you is that you shouldn’t do professional services, or if you should, you should do small amounts of it. The problem with this advice is that it’s wrong…

Let me first explain to you why investors are against Professional Services, and then I’ll tell you why it’s important. Investors will tell you that it’s a low margin business, and that you should only invest in software, which is a high margin business. Investors will also tell you that Salesforce.com does very little professional services and lets third parties do it. I was at Salesforce.com in the early days; they used to do Pro Serv. It’s true that they mostly got out of it by stimulating the market around them to do Pro Serv for them. They got out of it because the financial markets, after they were public, were punishing them for the low margin business. After you’re public, if you want to exit Pro Serv and stimulate a market, be my guest. But when you start a company it’s critical, and even Salesforce.com knew this.

The most important attribute of an early stage software company is referenceable clients. To get referenceable clients you actually have to work with them, making sure that it not only delivers success, but their champions know. Referenceability is everything in an early stage software company, and your software will not implement itself. And while investors are against Pro Serv, many startup product people don’t want to do it either because they have to do the grubby work of working at a client.

I believe in your first year, you should be about 50% Pro Serv. If you pick a few big referenceable accounts and make them successful, year 2 will sell itself. And your goal in the early days is not to get immediate, massive, linear growth; your goal is to get referenceable accounts. And as it happens, this Pro Serv can also be valuable revenue and profit for you. You shouldn’t price it, of course, at 60% margins; you’re probably going to price it at 20-30% margins. But margin is margin is margin, and it will help fund your business.You can often get paid early for your Pro Serv contracts and that cash flow can be non-dillutive financing.

The critical thing is not to get addicted to it – don’t fall prey to Pro Serv’s crack. And while you can have Pro Serv, those clients have to buy your software, they can’t just buy services. Third parties simply can’t do it for you. You don’t have a market, they don’t know your product, they’re not going to focus on quality. Third parties is what you do after you’ve been successful and you can hand off a repeatable process to somebody else. As you become bigger, you reduce Pro Serv to 15-20% of your revenue, but still not zero. Over time you can consider reducing the margin on Pro Serv, even to zero percent, if you have enough software revenue. You still want to keep the Pro Serv, because that’s what continues to guarantee you customer success.

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Mark gave this discussion on 4/26/16 on Snapchat. If you want to watch more content like this when it breaks, follow him on the ghost:  https://www.snapchat.com/add/msuster.