How can you overcome negotiation deadlocks with founders and entrepreneurs?

Turn your negotiations into a positive relationship and collaborate, Or run away with your money and let them run with their great idea.... Both sides need to win and execute,execute, execute

negotiation deadlocks occur because the parties are focusing on positions rather than interests. Try to understand the underlying reasons behind the founders' demands or refusals. This deeper understanding can lead to creative solutions that address the core concerns of both parties.

Establishing trust through transparent discussions and addressing the underlying concerns can help build a foundation for productive negotiations. Additionally, clarifying expectations and finding common ground on key issues can contribute to breaking the deadlock.

To identify the root causes of any deadlock, it often begins with listening and understanding the why. Disagreement in valuation, strategic goal, and longterm vision often are a byproduct of misunderstanding of parties and the questions on why are often answered with information on how they arrived at the respective negotiating position.

In India, this is a very common issue where the deal gets stuck due to bad negotiations either from the founder or the investors side which wastes a lot of time for both. Few reasons for deal stuck which I have experienced: 1. Communication Issues 2. Valuation Disputes 3. Due Diligence Concerns 4. Terms and Conditions Misalignment 5. Market Conditions 6. Trust Deficit 7. Legal and Regulatory Challenges To overcome these challenges, prioritize open communication, address valuation concerns, conduct thorough due diligence, align on terms, and foster a collaborative environment.

Successful negotiators understand their opponent's BATNA (Best Alternative To a Negotiated Agreement) well, particularly in win-lose negotiations where preserving one's BATNA is paramount. However, in win-win negotiations, it is advisable for both parties to be aware of each other's BATNA, as a typical win-win scenario lies between the BATNAs of the two sides. Consequently, when a win-win negotiation encounters a deadlock, it may be beneficial to redefine the BATNAs for one or both sides. This involves redefining the negotiation scope and persuading the other party to accept the revised terms.

Expanding the scope of the negotiation and exploring alternative options and trade-offs can be a helpful approach for resolving a deadlock. This involves looking beyond the initial terms and parameters of the negotiation to identify additional opportunities for compromise or creative solutions. Offering different terms in exchange for a different valuation could be a way to break the deadlock while still meeting both parties' needs and priorities.

Absolutely, broadening the negotiation horizon and considering alternative options is a savvy move. Your suggestion of offering a lower valuation with enticing terms or exploring a higher valuation with strategic conditions aligns with my experiences. It's all about finding that sweet spot that caters to both parties' interests and needs. Don’t give up if you really want to have a relationship together.

To overcome negotiation deadlocks with founders, we focus on open communication and empathy. Understand Founder perspectives and priorities, and clearly explain your VC stance. Seek common ground or mutual benefits, rather than adopting a hardcore approach. Introduce creative solutions or alternative options that address both parties' core interests. Sometimes, taking a brief break can help reset the conversation. If you emphasize long-term relationships over short-term gains, and showing willingness to work collaboratively towards a mutually beneficial agreement then you will create a win-win solution.

When confronted with a deadlock, widen the negotiation landscape by exploring alternatives and potential trade-offs. If valuation proves a sticking point, consider proposing a lower valuation coupled with advantageous terms like increased equity, a board seat, or a convertible note. Conversely, agreeing to a higher valuation could be acceptable with more stringent terms such as reduced equity, a veto right, or a liquidation preference. This strategic exploration of alternatives seeks a compromise that aligns with the interests and needs of both parties.

Make the amount of equity awarded to funders / entrepreneurs dependent on objective measures of the business's success at different points in time e.g. value of sales, profits etc. If the business is more successful, it is more valuable and founders keep more. Otherwise, it is less valuable and the same amount of investment buys a greater stake in the business. This allows debates about what the business is worth to be avoided and deferred to when there is actual evidence of the business's value, and also creates a sense of fairness on the part of both the investor and the founders.

Using objective criteria and benchmarks is a valuable tool for breaking a deadlock and finding a resolution. This involves relying on data, research, and industry standards to support one's position and persuade the other party. In the example you provided, using market norms and best practices to justify the terms of a deal can help both parties better understand the terms that are considered fair and reasonable in the industry. This can also reduce the emotional and subjective elements of the negotiation and focus the discussion on the facts and figures that are most relevant to reaching a resolution.

Forecasts can be a source of alignment because typically founders will have a higher than realistic forecast, especially timing-wise. Often investors will apply a very large discount to the forecast and then value the business accordingly. Why not accept some slightly discounted version of the founder's positive forecast, value the business off that and then apply a ratchet, reducing the effective valuation / increasing the investors number of shares should the company miss it's forecast? Often founders and investors can find alignment using this type of compromise on valuation.

In the deadlock maze, introducing the Sherlock Holmes of negotiations – objective criteria and benchmarks. Whether it's proving the startup's potential with data or justifying deal terms using market norms, it's like bringing a rational investigator to the negotiation crime scene. A dash of deduction to reduce the emotional noise and create a more Sherlock-approved dialogue.

Revisit your ZOPA No one wants to be the first to set out a price in negotiations, but at some point, someone must. Once both parties state their price, create a Zone of Possible Agreement (ZOPA). This sets expectations on both sides of the valuation boundaries. Negotiations follow the process of discovering facts that narrow the ZOPA leading to a purchase price. However, emotions are inherent in negotiations which lead to deadlocks. When this occurs, it is best to revisit the ZOPA. Using the ZOPA, it is easier to release the deadlock and continue with the negotiations.

By seeking outside expertise, both parties can gain a more comprehensive understanding of the negotiation landscape and develop a more effective strategy for reaching an agreement. Furthermore, seeking outside advice can also help to reduce the emotional and subjective elements of the negotiation and promote a more rational and productive dialogue. For example, an advisor may suggest that the founder seek legal advice before agreeing to certain terms in a deal, or that the investor consider a longer-term investment horizon when evaluating the startup's potential. Overall, seeking outside advice and expertise can help to break a deadlock by providing a more informed and constructive negotiation process.

I'm sorry to say that in several cases I've experienced as an investor, the reason we got into an impasse in the first place was well meaning yet what I would call "boiler plate/template" advice to the founders by domain experts who themselves had not raised multiple rounds for multiple startups and had never been in a startup that executed an exit. I remember how unsure I was when I started my first business, hence I appreciate the fact that Founders feel the need to bring in IP and support from outside. They just have to match advice they receive to the relevant experience of the person giving it.

Communicate and let the other parties know your proposed approach, even if they are only incremental or deal with a small part of the overall picture. I can think of a few examples where making a small suggestion about a proposed approach inspired other parties to apply the same or similar logic in a different way and reach agreement.

In the face of a deadlock, seeking external feedback and advice can be a strategic move. Turning to a trusted third party, such as a mentor, colleague, or advisor, provides an opportunity for fresh perspectives and valuable insights. A neutral observer might unveil hidden interests or concerns of the involved parties, proposing innovative deal structures for mutual benefit. Moreover, external guidance can assist in evaluating your own position, refining negotiation strategies, and enhancing overall skills. Embrace the expertise of a third party to break through the impasse and pave the way for a successful resolution.

Something that’s crucial to first time founders is PE advisory board. Bankers who will follow company from early stage can add a lot of value. CEOs who retired in similar vertical can add introductions and wisdom in raise process. Not all PEs behave the same. Some are focused on top metrics and min growth rates, some focus on long term capital gain. The key is to understand your options and that will come from retained advisors. With equity in reward lots of great advice can be secured.

While seeking legal counsel is a prudent step, escalating withlegal action too early can derail what otherwise may be productive discussions en route to a mutually acceptable agreement.

One flexible way to overcome a deadlock in a negotiation is to formulate additional demand. In that way you widen the playing field again.

Being flexible and patient can be a key factor in resolving a deadlock. By demonstrating a willingness to compromise and adjust one's expectations, both parties can signal their commitment to reaching a resolution and show respect for the other party's perspective. Additionally, showing patience in the negotiation process can help to build trust and reduce the tension and frustration that can arise in a deadlock. For example, the investor might decide to take a step back and reevaluate their expectations for the negotiation if they find themselves in a deadlock with the founder.

In negotiations, fostering a positive atmosphere is crucial. Embrace flexibility by adjusting expectations and perspectives based on new insights. Patience becomes a virtue as you navigate uncertainties without losing focus. These traits showcase commitment and respect, nurturing a collaborative environment that enhances the likelihood of overcoming deadlocks. By embodying flexibility and patience, you not only exhibit a dedication to finding common ground but also contribute to a more constructive and fruitful negotiation process.

Overcoming negotiation deadlocks involves leveraging neuroscience for mutual benefit and trust. Activate trust networks by demonstrating reliability and transparency. Use empathy to understand founders' perspectives, creating shared emotional experiences through mirror neurons. Frame negotiations as a collaborative effort for mutual success, aligning with the brain's reward system for cooperation. Ensure fairness to activate the brain's reward circuitry. Craft a positive narrative about future collaboration, tapping into the brain's response to storytelling. Utilise reciprocity to strengthen trust foundations, contributing to successful negotiations and future investments.

Listen closely to understand their core concerns. and reflect back to validate you heard them accurately. Also, frame the discussion around mutual interests and problem-solving rather than opposing positions. Having a common interest in mind is crucial.

Navigating negotiations often feels like choreographing a dance, each move strategic and nuanced. One memorable encounter involved resolving a valuation deadlock by proposing an unconventional mix of terms that aligned with both parties' priorities. It reinforced the notion that creativity and adaptability can be potent allies in the intricate art of deal-making.

Being knowledgable with regards to industry data is essential to any negotiation. Fortunately, there are many public sources of data, including Pitchbook, Carta, Angelist, etc., which can help prepare founders and investors for negotiation.

Its about mutual respect - acknowledging that 2 parties are coming together for a common vision. So your first assessment should be do you as a founder or VC align with each other. Next picking your priorities - understand that not all deal terms will go your way; so pick and choose accordingly. And its finally about your gut feeling as a founder; what's your BATNA - walk away if required, but also don't loose sight of the bigger picture.

I think VCists must innovate to resolve founder negotiations nowadays. Valuation, trust, and strategy must be identified. Expanding presentations or using benchmarks are useful but not necessarily the answer. Focus on 'pivoting swiftly and negotiating intelligently' in an adaptable time. It would be best if you had data-driven techniques and market dynamics knowledge. Innovations like equity-cum-revenue sharing help dissolve stalemates. Innovation, originality, and market awareness must accompany flexibility and patience. I can say, "It's about being creatively right." Blending old methods with contemporary ones for mutual benefit is a trend.