Negotiations

Negotiations

An art with a little science to back it up!

Negotiation

•  Who negotiates? – Ensure clear decision making lines – Delegate authority to the negotiator,

regardless of “status” •  Be prepared -- know ranges of acceptability •  Share financial pro formas, business plans •  Be creative with proposals and strategies

Negotiations

•  Give and take is for real -- lose some, win some

•  Generate options that meet needs of both sides

•  Be prompt; meet commitments •  Focus on interests, not positions; on

problems, not people

The Infamous “Win-Win”

•  Can you really achieve a win-win? – Finding your BATNA (best alternative to a

negotiated agreement) is critical – Almost always, the answer is yes

•  You will leave opportunity and money on the table

•  Don’t confuse winning with not losing

Types of Negotiation

•  Brinksmanship •  Capitulation •  Principled

•  Each approach makes sense in a particular setting

Brinksmanship

•  Constantly threatening to walk from a deal that doesn’t meet demands

•  Can lead to the “prisoner’s dilemma” – Two parties using brinksmanship concurrently

can both wind up worse off – e.g. Cuban missile crisis, MAD

Prisoners’ Dilemma Prisoner  B  cooperates   Prisoner  B  defects  

Prisoner  A  cooperates   A  &  B  serve  1  year   A  serves  3  years  B  goes  free  

Prisoner  A  defects   A  goes  free  B  serves  three  years  

Each  serves  2  years  

•  Each party gets a higher payoff by betraying the other •  Often leads to the Nash Equilibrium

•  Each player makes the best decision they can given what they know about the others

Capitulation

•  The strategy of no strategy at all. Give in because you want it to be over.

Principled

•  Seek first to understand, then to be understood

•  Try to guess what the other person needs •  Hold firm to areas of true importance

Negotiation Theory

•  To get more of what you want, should you lead or follow?

Anchoring

•  The first offer often sets the tone and substance of the negotiation

•  http://hbswk.hbs.edu/archive/4302.html

BATNA

•  Best alternative to a negotiated agreement

•  In layman’s terms: backup plan •  You must have a principled place to land if

your offer is rejected •  Spend your research time figuring out

your peer’s BATNA and you’ll figure out how to win

Marc’s Negotiation Conjecture

•  A good agreement is when each side walks away equally unhappy.

•  Reciprocity

Negotiation Tip

•  Create a list – Need to have – Want to have – Don’t care

•  Sacrifice the wants to get your needs •  Try to align your “don’t cares” with their

“needs”

Be Objective. B…E…Objective

•  Spreadsheets are your most powerful tool •  Don’t anchor yourself over false

pretenses, do the math

Your mom was right

•  Share •  Building trust starts with sharing

information and being open •  If you’re losing the deal, tell them

Good faith vs. Bad faith

•  Good faith: you’re trying •  Bad faith: you’re lying

•  If someone mentions that both parties are negotiating in good faith…watch out! – Often a signal that they’re not sure YOU are

Negotiating a Position of Power •  Perceived power is real power •  You are not always weak •  Technology is valuable •  Separate what you want to have from what you

have to have •  Do not, under any circumstances, lie to improve

your position –  Creative use of language is, however, encouraged

Information is Power!

•  Valuable sources of information – Comparables – Experience

•  Use the inventor – Close to the scientific “bleeding edge” – Rarely as up to date on the market

Comparables/Industry Standards •  What do you compare to? •  How do you compare:

– Higher royalties to higher initial payments? – Differing technologies or markets?

•  Weaknesses of available sources: – SEC filings (e.g. RECAP) are biased due to

reporting requirements •  only the big deals get filed (materiality) •  key information may be redacted

– Data is incomplete

Rules of Thumb

•  Whose thumb?

•  An example: The 25% rule

•  There are better ways

What does industry do? •  Industry  uses  financial  modeling  techniques  

– Es@mates  markets,  penetra@on  rates  etc/  – Es@mates  income  – Es@mates  expenses  

•  Uses  Discounted  Cash  Flow  (DCF)  to  determine  Net  Present  Value  (NPV)  – May  also  look  at  Internal  Rate  of  Return  (IRR)  and  payback  @me  (the  @me  when  cash  received  exceeds  cash  paid)  

What is Your Mission?

•  Meet your minimum requirements? •  Advance your position? •  Advantage both parties? •  Win? •  Defeat the other side at all costs?

Example 1: A Truly New Idea •  What do you want to know?

– What makes it unique? – How much better than the last, best thing? – Stage of development?

•  Investigate, don’t assume

– Approximate costs? – Competitive landscape

•  Best possible potential

Example 2: Product Improvement

•  What do you want to know? – Who owns the original idea? – Does the product still exist? – Does the inventor have contacts at the

company? – Does the technology holder have a plan to

prevent obsolescence?

Example 3: New Use

•  “Recycling” •  Who owns original idea? •  Is your use really new? •  Is the use defensible? •  Surprisingly valuable, in RARE cases

– e.g. Taxol, Prozac

Business Model Canvas Key Partners Key Activities Value Propositions Customer Relationships Customer Segments

Key Resources Channels

Cost Structure Revenue Streams advertisements or suggestions.

Finding the Unique Value Proposition

•  What is it that you do that the other side needs or wants?

•  What would it cost them to do it themselves?

•  My goal is always to guess the other side’s business model and attempt to align mine

©  2014  University  of  New  Hampshire  |  innova@on.unh.edu    

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Basic Concepts of Valuation

In a Perfect World…

e E rT

T

T ) 0.5 +r ( + (S/E) ln 2

σ

σ

T d2  =    d1  -­‐  s      where    d1  =        

Value  of  IP      =    S  N  (d1)  -­‐                                          N  (d2)      

…but back to reality

•  Few rules •  Market may not be

clearly defined •  Different firms have

different needs

Valuation

•  Most important concept is time value of money (NPV) – PV =sum (FV/(1+R)^n), where

•  Sum = sum of all future values •  R = rate

– Minimum return rate needed to consider investment

•  n = period – Months, years

Discounted Cash Flows

•  DCF includes NPV but also adjusts for risk •  Risk rate/discount rate/discount factor are

interchangeable in licensing but very different in the real world

•  For mature companies the risk rate is very low and often the investment rate/coupon rate is used

What the What?

•  Mature company (public) –  Look at the coupon rate on their bonds (WSJ)

•  Late stage company: 15% •  Mid-stage company: 25% •  Early-stage company: 40% •  Funded startup: 50% •  Our startups: 60-100%

•  For startups, due to risk, cash flow estimates >3 years are effectively ZERO

Valuation

•  What do I have? – Diligence helps to ballpark value

•  What is this worth? –  Worth what the market will bear

Venture Capital Valuation

1.  How much money do you want? 2.  I want XX% of your company. 3.  Divide those numbers and you have your

valuation.

©  2014  University  of  New  Hampshire  |  innova@on.unh.edu    

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