Successfully taking an idea to market involves many more negotiations than most entrepreneurs realize. First, they must figure out whether to share credit with any partners or advisors who helped them along the way. Then, they need to determine who owns what, and who controls what, as they make their way through multiple rounds of investment.
Once employees are involved, they must figure out who will have what responsibilities, how production targets can best be met, what the marketing strategy will be and whether employees are entitled to equity shares (and which kind) in the company.
There may be leases for office space and relationships with suppliers to work out. Then, at some point, many entrepreneurs will need to reach an agreement with their board of directors or their investors about whether or not to sell or merge the company.
Every one of these decisions involves negotiations; if they are not handled properly, even the best ideas are doomed. The four most common mistakes that entrepreneurs make are:
- they allow emotions and ego to get the better of them;
- they are not sufficiently prepared to deal with technical complexity;
- they have no strategy for coping with uncertainty; and
- they negotiate in ways that undermine relationships and reputations that are often crucial in the long run.
Emotions and ego
While it is true that most inventors know more about their inventions than anyone else, many inventors are much more likely to fall prey to a series of cognitive biases, like reactive devaluation (i.e. unfairly attributing negative motives to a negotiating partner), than someone who is not as emotionally involved.
This means that knowing when and how to rely on agents or intermediaries is very important.
It is hard to explain something to someone who doesn’t have the same technical background as you. Many entrepreneurial efforts stand or fall on the willingness of investors to believe that a prototype or an underlying concept will work as expected. They may ask experts of their choosing to assess a concept or a prototype.
When experts disagree, it can be hard to sort things out. By engaging in joint fact-finding or pilot tests together, inventors and investors can reach grounded understandings that might otherwise elude them.
Inventors are often willing to shoulder more risk than investors. At the very least, investors may want a guarantee of greater reward for taking on what they see as substantial risk. This tension over risk and reward often manifests itself in a contest over control of seats on the board of directors or hiring/firing power. Sometimes it comes down to valuation of a company or allocation of equity shares as a hedge against risk.
It is important for entrepreneurs to be ready to negotiate.
One way out of these battles is to formulate contingent agreements. If two parties disagree on the risks they face moving forward, they can formulate a set of interlocking agreements with elements that are only triggered as milestones are met. Contingent agreements are more complex, and legal advisors may shy away from them, but they often are the best way of coping with complexity in entrepreneurial negotiations.
Many inventors are too focused on financial considerations. They just want a deal. To get a deal they often say things that turn out not to be true. When it becomes clear they can’t live up to what they promised, trust is lost.
The success of many entrepreneurial efforts hinges on cooperation over time, so a breakdown in trust can be devastating. Knowing when and how to share information, and what to keep secret, is the key to negotiating in a way that leaves relationships intact, or even improves them.
There are many stories of entrepreneurs who have negotiated what appeared to be lucrative deals with venture capitalists, only to end up with nothing. It is important for entrepreneurs to be ready to negotiate, and to know how to learn from their own negotiation experience.