The main way tech startups grow is through creating technology that solves valuable problems for their customers but another way they grow is through cutting smart deals with other companies.
The first few deals I negotiated were content licensing deals, first for Microsoft’s online efforts and then for Yahoo, back in the mid-to-late 1990s. Since then I’ve cut maybe a hundred deals or so, and helped startup founders negotiate a hundred or so more.
There are such a wide variety of potential deals your startup might be introduced to or go seeking out, but a partial list might include:
- Licensing
- Distribution
- Reseller
- Subscription
- Acquisition
Although each type of deal is quite different, there are some underlying principles I’ve learned the hard way over the years; understanding some of them might help you draft better deals, negotiate them more successfully, and see better outcomes from them in action.
Your time is worth as much or more as any deal
Most deals take some time to negotiate, and you and your small team only have so many waking hours in a day to make progress.
If you take a first glance at a deal that comes your way and don’t immediately reject it as preposterous, negotiating with the other party will take some time away from the rest of your business, so don’t waste that time.
If in early discussions the other party appears to be slow, unresponsive, argumentative or unreasonable, pull the plug and walk away, because they may be able to afford the wasted time, but you can’t.
If you’re on a trajectory towards success, you will have more leverage if they come back to you in the future, when there may be a different representative on their end, or a better process, or an easier deal structure to agree to.
Understand the principle of leverage
Think of the power you have in deal making as your “leverage”.
Leverage is how much the other party values what you bring to the deal, and how easy it is for you to offer it to them. If the other party doesn’t assign much value to your part of the deal, and it’s hard or time-consuming for you to offer, you don’t have much leverage.
You don’t have much power in the deal.
If a major bank wants you to provide them with a private version of your SAAS product for their employees at theirbank.yourstartup.com and is prepared to pay for that to happen, you don’t have much leverage in pushing back on them to say it’s going to take too long and too many engineering resources.
If you’ve built your SAAS startup from the beginning to be easily ‘skinnable’ for multiple banking partners, it’s going to take much less time and engineering resources, and you have potentially more leverage in the deal.
If they highly value an exclusive deal with you to lock out the other major banks from doing the same thing, you have even more leverage.
Startups are small companies, and small companies have fewer customers, a less valuable brand, a shorter trading history with customers and other partners, and hence, less leverage, as a rule.
Figure out what’s negotiable
Deals are fundamentally about negotiating, and the things you negotiate about have to be …negotiable!
That sounds obvious but it’s often not when you’re a startup founder and you have a high level of confidence about the mission you’re on (or maybe when you’re working for that startup founder).
Since a deal can only get done if both parties find something of value in the deal, it’s important to make as much as you can negotiable before you set out to strike a deal. If you tell me the price, the cobranding, the service and support, the feature set, the per-seat structure, the term and the announceables are all non-negotiable, I don’t need to be a fortune teller to know that you’re not going to get many deals done.
One day, when you’re bigger than Google, you’ll exercise so much market power, you’ll bring so much leverage to every deal that governments will start investigating your deals to make sure you’re not being unfair. Until then though, you have to bring something to the table that will have value to the other party.
Try to make as much as possible available for negotiation. Don’t tell the other party that (always go in with a draft deal template to start negotiating from, because it takes less time) but in the back of your mind, try to make as much as possible a negotiable term.
Remember the goal is to get a deal done, not to negotiate the perfect deal.
It can help to write out a list of all the benefits you could offer the other party (ranked in order of how hard they are for you to offer) and a list of all the benefits you might possibly ask the other party for (ranked in order of how valuable they might be to your startup).
During negotiations have a clear sense of where the current deal sits, in relation to what you’d regard the equilibrium point to be between what you’re able to offer and what you’re seeking to receive.
As you negotiate each point of the deal, aim to make sure that you give nothing negotiable away without receiving something of roughly equal value to you in return, keeping in mind the differences in leverage each party has (the more leverage, the more the balance swings in favour of that party).
Value can sometimes be in the strangest places
What the other party values could be very different to what you think they should find valuable.
You might offer to save their employees 5% on their home insurance but the big employer you’re negotiating with might actually value the opportunity to issue a press release or announce to their board that they’re working with a cool new startup, because that makes them look innovative.
Sometimes the individual on the other side will have a number of deals per year, or a value, as a performance goal tied to their compensation. Helping them make their annual bonus could be the only reason you’re in the deal.
It can be surprisingly hard to find out what the other party actually values in a deal, versus what they say is valuable, and you won’t find that out by doing all the talking yourself. The true value in a deal only comes to light when you learn to listen.
The moment you think you hear something that they value highly, and you’ll find easy to deliver, this is a deal you want to do.
Imperfect deals can sometimes be the best deal you’ll ever do
When I worked at Yahoo we were still a small company in terms of headcount but had an enormous share of the online audience. We weren’t yet subject to anti-trust investigations but our audience was getting so large it was highly valuable and all kinds of tech and consumer brands sought partnerships and distribution deals with us to get some of that audience.
Yahoo’s primary offering was a hand-curated directory of what our team considered to be the best websites on the internet.
If our directory didn’t have the thing you were looking for, we’d serve you a set of search engine results, powered by a third party search engine run by whichever smaller search engine startup wanted to pay us the most money for an annual distribution deal.
The search engine would get the brand recognition in front of the Yahoo audience and the user too, if they chose to click through to the search engine.
As our leverage grew with our audience, we were able to command an ever increasing price from the search engine startups as they bid against each other for our distribution.
Millions of dollars were changing hands and the deal looked progressively less favourable for the incoming search engine each time.
But backed by their venture capital investors prepared to lose millions to build a brand and get some users, a little scrappy, nerdy search engine startup called Google stuck with the ever-increasing price of search distribution deals with Yahoo until, one day, they didn’t need us anymore.
A deal that sucked for them at first, eventually helped them beat us, hands down. So don’t turn away every deal because you don’t think it’s perfect.
A year is a long time in startups!
Final note of caution
Deals don’t enforce themselves, and your laboriously structured and specified agreements won’t have any effect on their own except to help everyone remember what you agreed to do, and by when.
On its own, the agreement can’t make your partner do those things. Many aspects of the deals you sign may be legally enforceable, but only through lawyers and court cases you probably won’t be able to afford.
A contract is not a substitute for a cooperative, engaged relationship between people on either side of the deal.
If you have to choose, prioritise building your relationship with the people over adding more clauses to a contract.
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