SUN MICROSYSTEMS WAS STILL in its infancy when, in 1983, two of its cofounders set out to raise $10 million in funding.1 After considering a number of options, Vinod Khosla and Scott McNealy had decided to pursue financing from a strategic investor, a Fortune 100 company that saw the benefit of getting access to the technology Sun was developing, and for whom the investment size would be nominal.2 Sitting down with the Fortune 100 CEO, Khosla and McNealy reached an agreement: a $10 million investment on a post-money valuation of $100 million.3 The parties shook hands on the deal and agreed to meet the following week in Chicago to finalize the term sheet.
Khosla and McNealy flew from San Francisco to Chicago for what they expected to be a short meeting to finalize remaining terms, most of which would entail standard provisions. They were surprised when the CEO showed up to the meeting with a dozen people, including a flock of bankers and lawyers. It was soon obvious that the bankers and lawyers would be doing the talking today, and that the negotiations would be conducted de novo, as if the discussions a week earlier had never taken place. As far as the investors were concerned, the investment size and the valuation were still entirely up for grabs.
Khosla and McNealy could only speculate as to what was happening. Had the CEO never perceived their “agreement” as being final? Were the bankers and lawyers simply trying to prove their worth by landing a better deal? Was there a perception across the table that Sun was too committed or desperate at this point to push back against last-minute demands?
The fact was, if push came to shove, Khosla and McNealy were willing to accept a lesser deal. But to accede to the demand for renegotiation would be costly—financially and on principle. What to do?
Khosla recalls his plan of action: “I did not even want to ask them what numbers they had in mind. I did not want to go any further down that path. I wanted to make a stand right away on the process.” Khosla told the group that his understanding was that certain terms had already been agreed to, and that he did not want to negotiate them again. Anticipating the possibility that the other side may not have expected this response, Khosla offered to give them time to regroup and discuss the matter. His message to them was essentially the following: “We had agreed on some things. Let’s start there. If that’s not what you want to do, then we need to discuss this relationship more fundamentally. Are we where we thought we were, or someplace else? Why don’t you talk amongst yourselves and let us know: Have we agreed or not?”
The Sun cofounders left the room to allow the investors to deliberate. When they returned a few minutes later, they discovered that nothing had changed. From the other side’s perspective, the numbers were still open for negotiation.
Now that the other side had doubled down on their hard-line strategy, Khosla and McNealy could think of no easy way to dislodge them. Perhaps they had reached the conclusion that last week’s agreement was too generous. But it was also possible that the real problem was a lack of organization on the other side, or that no one was prepared to back down too quickly, especially in front of the CEO and the Sun team. This left two options as far as Khosla and McNealy could see. The first was to accept a hit on the numbers and just get the deal done. But Khosla and McNealy decided to take the second option; they told the CEO that they would love to continue discussions where they had left off the previous week, but if that was not possible today, they would have to leave Chicago without a deal.
About an hour later, Khosla and McNealy were on their way back to San Francisco with no deal. They then mustered up whatever resolve they had left to stop themselves from calling the CEO back after reaching home. If they had understood each side’s interests well, the dollars involved should not have been a deal breaker for the other side. Khosla remembers: “Valuation mattered a lot to us. We just wanted the money at the best price, with the least dilution of our equity. Their interests were mostly strategic, and the numbers were not big for them. Losing the deal would hurt us but not kill us; and as far as we could tell, they did need us.”
The cooling-off period worked. A few days later, the CEO called Khosla and agreed to go back to the original terms. This time around, when the teams met to finalize the deal, there were no surprises.4
What had led to this conflict? In everything from mundane negotiations to complex deal making to protracted conflicts, I have often witnessed a tendency to rush towards achieving agreement on substance and to ignore alignment on process. Of course, both are necessary. But when it comes to important negotiations, process considerations should, in large part, precede substantive deal making: negotiate process before substance.
Consider the following: you have been negotiating with your counterpart for weeks. After considerable effort, you seem close to reaching a deal. You decide to offer one final concession that you have so far resisted and agree to one of their more onerous demands—a move you hope will seal the deal. You make the concession, and the other party responds, “Thank you. This is extremely helpful. I appreciate your flexibility. Now, I’d just like to go over things with my boss to see what she thinks about it.” And you are sitting there, stunned, thinking to yourself: “What? You have a boss? I thought this was going to be the end. I have nothing more to give.” The mistake, in this somewhat stylized example, is one that is all too common. It is a failure to negotiate process before diving into substance.
Negotiating the process involves evaluating the default (or proposed) process and reshaping it if necessary and possible. It also entails asking questions, sharing assumptions and expectations, and reaching as close to a common understanding as possible on the path from where you are to the finish line. How will we get from here to there, and what are the factors that can influence the trajectory and speed? A failure to negotiate process effectively can lead to mistakes on substance later on, including poorly timed concessions; ill-conceived proposals or demands; coordination failures across different tracks or channels in the negotiation; and the failure to anticipate barriers, such as deadlines, political or bureaucratic hurdles, and the behavior of spoilers.5
Just because you’ve negotiated the process does not mean things cannot go wrong. Even when there is clear agreement on process at the outset, parties can sometimes get misaligned regarding their views on where they are in the process. For example, one party may feel that they are close to a deal and should forgo other options, while the other thinks it is still legitimate to be shopping around. In the case of Sun, the conflict was probably not as much about dollars and cents as it was about a lack of coordination on where they were in the process; indeed, no further concessions were needed for Sun to lock in the investment. Khosla still does not know what was really behind the seeming about-face by the CEO. But whether it was an attempt to squeeze a few last-minute concessions, or simply a difference of opinion as to whether the deal had really been reached a week earlier, one lesson is clear: it is important to align expectations regarding where you are in the process.
So far we have been assuming that you have some ability to create a process that is to your liking, but this is clearly not always the case. In my experience, even when you have no ability to shape the process, there is much to be gained by seeking clarity and commitment on the process. Greater clarity (an understanding of the process) and commitment (assurances that the process will be followed) can help negotiators navigate towards better outcomes and avoid strategic and tactical mistakes even when they do not have the leverage to change the process.
The same is true in negotiations of all types. For example, if bankers are running the sale of an asset such as a company, they have a lot of choice and control over the negotiation or auction process they design (e.g., how many rounds of bidding, on what basis bidders will be eliminated, what information will be shared and when, etc.). If I am on the other side of the table, even if I have limited influence on their process strategy, it would be a mistake not to get as much clarity as possible on what the process will be and as much commitment as possible that it will not be altered to my detriment. Likewise, salespeople and strategic deal makers who don’t fully investigate how a client organization makes buying or partnering decisions are putting themselves at an unnecessary disadvantage, even if there is no opportunity to influence the process. Even in simple situations, it is remarkable how often people will forgo the possibility of gathering process information that is both available and useful—for example, a job applicant failing to investigate how long an employer needs to make a hiring decision, or a homeowner not seeking clarity on how long a home renovation should take and what factors could cause delays.
If you fail to negotiate or get clarity regarding the path ahead, you risk being blindsided later in the process. But it is not enough that you have clarity—the other side must have it as well. If they don’t, you may be the one who suffers the consequences. How so? If you have ever witnessed or participated in a mediation process where there is a high degree of animosity between the disputing parties, you may have heard the mediator say something that is quite important in the initial meeting. A good mediator will, in one form or another, issue the following caveat early on in the proceedings:
You think you hate each other today? We will be working together on some difficult issues in the coming weeks, and I can tell you from experience, about three days into this process, you are going to hate each other more than you’ve ever hated each other. And when that happens, I want you to remember something: that’s normal.
Why would a mediator say this to disputing spouses, neighbors, business partners, or other antagonists? Consider what happens if the mediator fails to issue this warning. A few days into the process, the parties begin to struggle with rising tensions and the kinds of extreme emotions they had so far avoided by refusing to discuss serious problems. They might infer that things are getting worse, not better, and think, “This process is not helping!” They may even opt out of the process altogether. If, however, the mediator has told them ahead of time that it is normal to feel acute anxiety and emotions, and that difficult conflicts don’t get resolved without hitting some new lows along the way, they are more likely to stick with the process.
The mediator’s tactic is important for negotiators of all kinds. One of the most important things a negotiator can do, especially when the path ahead is likely to be difficult or unexpected, is to normalize the process for the other parties in the negotiation. Give them a preview of what to expect—the good and the bad—in the days, weeks, or years ahead. If you do not manage expectations in this way, the first time something goes wrong, they will question your intentions or capability, or doubt the viability of the process. I have seen this problem arise in everything from mismanaged sales cycles, to poorly handled early discussions between cofounders, to cross-cultural business negotiations, to negotiations between governments and armed insurgents. In every case, the negotiations were difficult enough on their own without the effects of mismanaged expectations. If you have normalized the process by clarifying what may delay or disrupt progress at times, which kinds of snags are inevitable (but remediable), and why things might depart from plan, the other side’s reactions to these events will be more manageable.
Normalizing the process is important not only across the table but also with stakeholders on your own side. If you are taking calculated risks for future success, investing resources in plans that will pay off further into the future, or sacrificing immediate progress in preparation for a more comprehensive victory later, it is important to educate your stake-holders—investors, board members, employees, constituents, allies, the media, the public, fans, and so on—not only about what you’re doing and why, but what the path looks and feels like between where you are today and where you plan to be. Even the wisest strategy is likely to have detractors, but negotiators often make life harder for themselves by failing to prepare stakeholders for the process they will need to endure.
As important as it is to normalize the process for others, it is also important to have others normalize the process for you. It does neither side any good for predictable problems to go undiscussed. You are less likely to judge them harshly in the aftermath of adverse events if the other side has prepared you for the types of disruptions that are common when negotiating with people, organizations, cultures, or countries such as theirs. Moreover, in anticipation of some potential problems, you may be able to offer solutions that mitigate the likelihood of (or damage from) such events.
It is not always easy to get the other side to discuss these issues. The reason people often fail to be forthcoming about potential problems is that, early on, before the deal has been signed, everyone is in “selling” mode. Salespeople, job seekers, employers, corporate deal makers, diplomats, and anyone else hoping to get the other side to say “yes” to working together has an incentive to make it seem as if things will go smoothly. They do not want to spend too much time delineating all of the ways things can go poorly, lest this destroy any chance of winning the deal, especially if their competitors for the deal may not be as forthright. This is why some of the onus is on you to encourage an honest conversation about the kinds of things that could go wrong in the deal-making process. In my experience, the more credibly you can assure the other side that you have enough experience to know that every protracted negotiation and every meaningful relationship has disruptions—and that discussing the risk factors enhances rather than diminishes your likelihood of consummating the deal with them—the more likely it is that you will have a productive conversation that helps both sides in the future.
Of course, there is no guarantee that the other side will respond to your request for clarity or discuss potential problems that may arise, but even a refusal by the other side to answer certain questions can be informative. In the case of process, if the other party in the deal or dispute will not answer reasonable questions about process, it allows you to further explore whether this reflects bad intentions or a lack of preparation on their part, or that they are merely keeping their options open. At the very least, you can be more vigilant as you navigate the deal.
The other risk is that your negotiating partner does clarify and commit to a process and then still reneges on it. I don’t know many seasoned negotiators who have not experienced this at some point. Yet, I have found that even in very difficult disputes, if people see value in preserving their credibility, they will often honor their word. Whether they follow through on their earlier assurances also depends on the extent to which the commitment they gave was made personally, explicitly, unambiguously, and publicly. More often, broken commitments are those that were (a) made by someone other than the person who is now reneging, (b) implied but never stated very explicitly, (c) stated in somewhat ambiguous terms, and/or (d) made behind closed doors. For this reason, whenever possible, it is useful to get commitments that address these features. Even a relatively well-intentioned party might be tempted to renege when incentives change and they can justify to themselves that they were not the ones to make the commitment, or that a lack of explicit statements of intent allows them to change their minds.
What if, despite your efforts, the other side reneges on their commitment? How should you handle a perceived violation of the process? While things worked out very well for Khosla and McNealy, is it really wise to call off negotiations when a process breach has occurred? Or, more precisely, when is it wise to push back? And how should you do it?
Sometimes, instead of walking away, the wisest move is to give the other side the benefit of the doubt, or to try to investigate and reconcile the diverging perspectives. You may discover, for example, that the other side really intended no breach, or that they are facing other pressures or constraints that make the breach necessary from their point of view. Other times, the breach is intended, or even premeditated, but you want to stay at the table because you have too much to lose by walking away or by escalating the conflict on the grounds of process impropriety.
Let’s take a closer look at the Sun approach to identify some of the key considerations that should guide us when deciding whether to accept or challenge a perceived process breach. Why did it succeed? First, from the Sun perspective, there was a high degree of certainty that a deal had been reached the prior week and that the current behavior was inappropriate. Second, the Sun negotiators felt very comfortable in the value they brought to the table; they did not think they had to sweeten the deal substantively to make it worthwhile for the other party. Third, they offered a principle-based reason for cutting off the negotiations, being clear that it was not about the money per se, but about the respect for process commitments. Finally, the Sun negotiators did not simply walk away from the table; they clarified the conditions under which they would be willing to resume negotiations. One thing the Sun negotiators did not do, which I would have advised, was to try to give the other side a face-saving means of calling back and reengaging. It’s best if you don’t force the other side to choose between accepting your demands and saving face. Even small gestures can help in a case like this, such as offering to make the follow-up phone call, or offering a small concession on style or structure that gives the other side an excuse for changing their stance.
These are five very important elements to consider before disengaging on the basis of process conflict:
• Can we be sure it was a breach, or does the other side have reasons to see things differently?
• Do we bring sufficient value to the table, and does the other party understand this?
• Can we justify our actions on the basis of acceptable principles?
• Have we clarified what would be required to fix the breach?
• Have we given the other party a face-saving way to return to the table?
The more of these questions that you can answer in the affirmative, the easier it will be for you to successfully challenge a perceived process breach.
This does not mean that you should expect or even want the path forward to always be entirely mapped out. Sometimes the path is uncharted because of a lack of visibility at the outset, and it can be clarified only once substantive negotiations get under way. Other times, someone cannot or does not want to commit to a strict process because it limits flexibility. It is important to give these considerations the respect they deserve on both sides, and to make sure that the desire to pin down a clear and rigid process does not unnecessarily delay progress on substance. But process should never be entirely ignored. An effort must be made to ensure that everyone is moving, to the extent possible, in the same direction and at the same pace. Looking back to the lessons learned in the early days of negotiating for Sun, Khosla recalls:
One of the things I now do differently is to pay much more attention to where each side thinks we are in the process. If I think we have an agreement but they don’t, we get into trouble like we did in Chicago. That does not mean I always want to make everything explicit as soon as possible. Sometimes, for example, early on in negotiations when you are also pursuing other options, the right strategy may be to keep things implicit or informal, or to not even try to reach a mutual understanding. But in all cases, you need to think about where each side is in the process.6
Having considered the importance of negotiating process, it is worth looking at some of the reasons why the wrong process can take hold. For one thing, the process we have today may not be a choice, but a consequence of poor decisions that were made before the current conflict arose. Other times, even our well-intentioned attempts at creating the right process can backfire. The next chapter looks at how we might anticipate these potential problems and what principles might guide us when we confront them.