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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Reading a Negotiation: Who Wants to Do the Deal and Who Wants to Argue?

October 15th, 2009

My normal strategy in a negotiation is to be frank about my client’s needs and try to find a collaborative solution for both sides.  Here is an example of when that worked really well, another one where it didn’t and what I could have done to improve the outcome.

Negotiation as Collaboration
In one recent transaction my client and its business partner had reached agreement on about 90% of the issues in the deal.  The last few were somewhat sticky because they were less about business terms than allocation of risk.  I explained our situation to the other side, then listened carefully to the other side’s points.  When we started going through the draft agreement I realized that the first two points were much more important to them, while some later ones were bigger points for us.  After hearing them out we agreed we could concede the first two items. The mood on the call immediately improved, the other side agreed to concede the items we explained were important to us and we breezed through the rest of the call.

Negotiation as My Way or the Highway
This strategy worked so well that I tried it again in another deal and it blew up.  The difference was that the attorney in the second deal had no interest in collaborating- she simply wanted to “win” every point.  That call was so adversarial, in fact, that everyone started shouting and stopped listening.  My client ended up getting everything it needed, but only by going around the attorney after the call and convincing the business principal that his attorney was standing in the way of the deal.

How I Avoid Making the Same Mistake Twice
The lesson I took away from negotiation #2 is to read the tone of the discussion as quickly as possible.  The people on the first call started out wary, then quickly warmed up through a candid discussion of the issues.  The attorney on the second call was belligerent from the outset and had no interest in talking through the business points.

Fundamentally I believe in my approach- I know my clients’ products cold, have business reasons to justify almost every point and a strong sense of which purely legal items we can give up in order to do the deal.  In my second deal, I should have avoided letting emotion take over, stuck to the business points and gotten off the call as quickly as possible so that both sides could work through the facts without having the attorneys showing off for their clients. The call might still have been unsuccessful but we could have avoided polarizing everyone.

My clients and I work as a team.  My job is not to win every point in a negotiation but to put the business terms into language both sides can benefit from.  I love this job because even though I have spent 11 years practicing my approach I still learn new things every time.

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