Set Yourself Up for Success

By PON Staffon / Business Negotiations, Daily

Adapted from “Do a 3-D Audit of Barriers to Agreement,” by James K. Sebenius (professor, Harvard Business School), first published in the Negotiation newsletter.

When talks stall, it’s tempting to jump to conclusions: “They’re being unreasonable.” “We’re not communicating well.” “We’re in a weak position.” Sometimes, however, setup barriers are to blame—that is, you don’t have the right people at the table at the right time, facing the right issues.

To get a better sense of setup barriers, put yourself in the shoes of Thomas Stemberg, the founder of Staples, the original big-box office-supply store. Thanks to a first round of financing from venture-capital backers, Staples’ concept of rock-bottom prices for small businesses beat early sales targets by 50%. With the threat of new competitors such as Office Depot, Stemberg urgently needed expansion capital. Logically enough, he returned to the VC industry.

But during the hunt for second-round financing, the question of valuation emerged as a potential stumbling block. The VCs appeared to be closing ranks, refusing to value Staples as highly as Stemberg hoped.

Stemberg faced an unfavorable setup—specifically, the wrong parties and a poor no-agreement alternative. He needed a better walk-away option and a way to access new parties more receptive to his preferred deal.

Generating a better financing offer would be standard good advice. Stemberg tried to do just this, approaching investment bank Goldman Sachs. Unfortunately, Goldman initially proposed exactly the same valuation to Stemberg as the VCs.

The next step was to consider which uninvolved parties might value the agreement more highly. For help in “breaking the cartel,” as he put it, Stemberg sought out Harvard Business School professor William Sahlman, an expert on entrepreneurial start-ups and venture firms. Sahlman advised Stemberg to approach the pension funds and insurance companies that backed the VC firms directly. “They may be limited partners of the venture capital firms,” Sahlman said, “but they often resent handing off 20% of the profits and a hefty management fee.”

After he followed this advice, Stemberg’s institutional funding options greatly expanded. Several limited partners of the VC firms put up their own money at Stemberg’s price, and he found other wealthy investors willing to do the same.

When he went back to his first-round VC backers, Stemberg had alarming news. Not only did they risk being cut out by their own limited partners, but they also might be crowded out altogether as other investors piled in. “Do you guys want to play or not?” Stemberg asked. They did.

Facing a flawed setup, Stemberg changed the scope of his negotiation by resetting the table with new parties whose interests were better aligned with the deal he wanted. The lesson: If you don’t like the way the table is set, reset the table by attacking the scope and sequence of your negotiations.