In business negotiations, our mistakes sometimes end up affecting not only the current deal, but our best alternative to a negotiated agreement, or BATNA, in deals that lie down the road. That’s a lesson that Ann Marie Gardner, the founder and editor of the magazine Modern Farmer, learned the hard way.
After settling in New York’s Hudson Valley, Gardner got the idea of starting Modern Farmer in 2010, Alec Wilkinson writes in a New Yorker profile. The quarterly magazine’s aesthetic – artistic cover shots of animals and articles on topics like growing plants for cocktails – attracts the type of urban dwellers who aspire to raise their own chickens rather than actual working farmers. Gardner calls it a “farming magazine for media professionals.”
Gardner’s quest for an angel investor led her to Canadian investor Frank Giustra, who made his fortune in the mining industry. Giustra negotiated for a majority ownership of Modern Farmer in exchange for start-up funding that was likely in the $2-3 million dollar range.
Later, a lawyer told Gardner that her deal with Giustra was one of the worst he had ever seen.
Handling a bad BATNA
“In an ideal angel investor situation, Giustra might have received twenty to thirty percent of the company,” writes Wilkinson. By giving Giustra majority ownership, Gardner gave away decision-making authority over her magazine and its future.
This became a problem soon after the first issue of Modern Farmer hit the newsstands in the summer of 2013, when Gardner realized she would need another influx of cash to stay afloat. Growing impatient, Giustra told her to look for another investor, but after Modern Farmer won a National Magazine Award, he offered to fund one more issue. When other investors failed to materialize, Giustra put up more funding in exchange for some of Gardner’s shares in the company.
Even as Giustra offered a life raft, his deepening ownership in the company could doom it by scaring off other investors. Venture capitalists typically prefer a start-up company’s ownership to be spread among several investors, none of whom own more than 50% of the company, one of the magazine’s advisory board members told Wilkinson. Investors may also take Giustra’s reluctance to invest further in Modern Farmer as a bad sign.
In the summer of 2014, magazine staff members began leaving for other jobs, and Gardner predicted Modern Farmer’s days were numbered. After tense negotiations with Giustra, however, she received a reprieve: more funding in exchange for yet more of her shares. Within weeks, though, the two partners were again arguing about how the business should be run, and Gardner resumed her search for long-term financing.
The domino effect of a bad BATNA
The tale serves as a reminder that negotiations can have a domino effect, with each one influencing those that follow. In Gardner’s case, a lopsided initial negotiation prevented her from finding new partners as it tied her to a partner who would like to cut his losses. Stuck in a dysfunctional business relationship, she found herself with a bad BATNA.
The story also highlights the importance of preparing thoroughly for negotiation. Even when you’re approaching someone with hat in hand, don’t assume this means you must accept whatever terms they offer. Rather, research the realm in which you are operating, examining common practices and typical deal terms. Then, try to do even better.
Originally published in 2014.