When your business has no revenue and you have very little
negotiating leverage beyond the power of your business idea, the
traditional rules of negotiation just don't apply. This
month's column offers some tips for the entrepreneur who's
faced with the prospect of negotiating with employees, investors
and suppliers during the startup stage.
Negotiating With Employees
In a previous
column, I discussed how to hire and pay employees during the
startup stage when you can't afford to pay market-level wages.
Inevitably, however, your employees and consultants will be faced
with a need for more money and will knock on your door to negotiate
a better deal. How should you handle this situation?
First, you should always be respectful of the personal needs of
your employees. In a small startup that's resource-constrained,
employees' personal lives and professional lives are
particularly intertwined. This doesn't mean giving employees a
raise if they ask for it, but it does mean listening carefully to
the reason for their request for more money. In many cases, they
may not need more money but simply more flex time, more vacation,
more upside potential, more downside protection, more respect or
more inspiration. Most employees--and especially
consultants--won't tell you the real reason for their request
unless you ask them repeatedly in different ways to describe why
they're really asking for a raise.
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When negotiating compensation, it's best to link employee
pay with company performance rather than just link it to employee
performance during the startup stage. This puts pressure on the
business model to work--so everyone gets paid--and it puts pressure
on team members to hold each other accountable, because their
compensation is linked to each other's performance.
The downside of this incentive structure is that you may have a
top-performing employee who doesn't get a salary increase or
bonus because of execution problems among his or her colleagues.
You should deal with this on a case-by-case basis and may want to
provide occasional bonuses for exceptional performance. In
practice, giving employees a gift certificate for a trip or an
expensive dinner out for their family and friends may provide a
better incentive than a cash bonus pool that becomes the source of
tension among employees. In a small startup, a cash bonus pool to
be divided among employees is a bad idea and undermines the base
compensation levels you've negotiated with them.
Negotiating With Investors
Traditional negotiation theories tell you to understand your
BATNA--or Best Alternative to a Negotiated Agreement--before you
begin negotiations. Unfortunately, for most cash-strapped startups
seeking capital from investors, your BATNA is going out business!
So a negotiation theory for startups requires a different approach.
Here are some tips for negotiating with investors when your BATNA
is closing shop and going back to a 9-to-5 job:
1. Never let them see you sweat. Investors will only put
money in a company if the entrepreneur is confident of the
company's prospects. They might know you have few alternatives
for startup financing, but when they see your confidence,
they'll temporarily forget about those other options.
2. Draft the investment terms before the meeting. It
might be putting the cart before the horse, but it's critical
to have investment terms clear in your head before you meet with
investors. If you're pitching venture capital investors, get
familiar with term
sheets before you walk in the door. If you're raising money
from relatives, friends or other business angels, read this
column for tips on how to make the pitch and structure the
investment options.
3. Tell minority investors that you have standard terms that
are non-negotiable. Don't let investors restructure your
investment terms unless they plan to lead the entire round of
fundraising. Most investors will actually prefer you to have
standard terms so they can focus on evaluating the business
proposition rather than the investment terms. Avoid the temptation
to negotiate individual terms with each investor because it will
likely cause you headaches down the line when certain investors are
paid back before others.
Negotiating With Suppliers
During the startup stage, it's almost always a problem to
negotiate favorable deals with suppliers. How can you strike a deal
for a volume discount when you can't accurately forecast sales
volume? How can suppliers provide you with credit when you
don't have a track record with other suppliers?
I recommend negotiating with suppliers just like you'll
negotiate with investors: Put your best foot forward, and let them
believe in your company as much as you do. For instance, let your
suppliers dream of the day when you'll be their biggest
customer. Negotiating a deal on favorable terms will be
considerably easier when they perceive your business as a potential
long-term client rather than a startup.
One concrete way to accomplish this with a key supplier is to
extend the duration of your order rather than just negotiate on
price--and, to protect yourself, by adding termination provisions
to the contract. Suppliers and their sales staff are more likely to
provide a favorable price for a long-term agreement with a
termination clause rather than to a small, low volume order. For
example, if you're reasonably confident in your business's
growth potential, try ordering three years' worth of supplies
rather than a one-year supply. But be sure to spread out the
payments over the life of the contract and add in an enforceable
termination clause.
Asheesh Advani is Entrepreneur.com's "Startup
Financing" columnist and president of CircleLending, a
loan administration company that facilitates loans among friends,
relatives and business associates. Get a copy of Circle
Lending's free Small Business Financing Guide for startups.
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