On Zero-Sum Deals

November 20th, 2009

Most of my work is building connections between two companies or people, which sometimes means negotiating a software license agreement and sometimes helping a group of founders start a new company together.  In most of these cases everyone benefits in some way.

A few times a year I help people unwind difficult situations as well.  These are much harder deals to do- emotions run high and frequently the two sides don’t trust each other at all.  There is a tendency to look at these disputes as zero-sum situations: one side needs to lose something for the other to benefit.

Occasionally that is right.  I worked on a transaction a while ago where there was only 1 substantive issue between the two sides- one guy thought he was owed a bunch of money and the other thought the amount was much lower.  In the end neither side got what they really wanted out of it, which was unfortunate.  The deal later fell apart and I believe it was mostly because neither side got enough value from the agreement.

Most disputes don’t work that way.  Usually each side has something it doesn’t really need but the other side wants, and vice versa.  My job as counsel is (i) to help my clients figure out what the other side really wants and how to give it to them (this was a great quote from Hiten Shah– if only I could find the tweet), and (ii) help my clients figure out what they can give in order to get the deal done, move on and stop talking to me as much.   Some of the “give” items are material; frequently there are intangible items as well like reputational benefit and helping someone exit a bad situation gracefully.

So how do I help clients figure these things out? This post has been stuck in draft form all week because this is the hardest thing to do.  I talk to my clients a lot about all the facts in the situation, we use legal arguments as a backstop to think about what the result would be in litigation, and we spend a bunch of time assessing the other side’s needs.

We then make a series of offers intended to reflect our needs, the value we place on the things we want from the other side and the items we think the other side wants.  If we are lucky, the other side has done the same thing and we can find a small patch of common ground in short order.  From there, the thoughtful back-and-forth process lets us feel each other out and eventually find the key terms to avoid a zero-sum equation.

In other words, the alternative to a zero sum equation is probably something like: 40% part pragmatics (esp. how much money everyone is willing to spend on lawyers), 30% legal knowledge, 25% psychology, 10% intuition.  The rest is luck.

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