5 ms·

You Negotiate Commodities, But You Seize Opportunities

165 points by icey 16y ago

jacquesm 16y ago
Interesting how your investors see you bringing this guy on board as an asset but only at a price that they are comfortable with and that might have brought a multiple in value. Makes me wonder how they'll feel about dilution if you ever need to go for more capital. On another note, did you put it to a vote? Do you still hold a majority?
- frisco 16y ago
  In practice, everything a board does is unanimous. If you respond to you VC board members saying "he is too expensive" with "let's vote on it", the company has WAY deeper problems.
  - jacquesm 16y ago
    The bigger problem in this case was that there was consensus about the budget before it was made clear what the goal to be achieved by spending it was. Being in business means being flexible and having a bunch of beancounters on the board that are scared to be diluted is not going to help at all. In such a case stating your case as clearly as you can, possibly in a follow up meeting (because he clearly was not well prepared for this one) would have been much better, also, and that's another critical mistake here, before you approach an outsider you first agree internally that you will do so, and what the budget for that particular outsider is. That could have saved some friction here. A ship has only one captain, if the VCs are on the board they are represented as guardians, but not in a decision making capacity, only an advisory role. Board decision are not nearly always unanimous, and it could very well be that a decision like this is determined during a general shareholders meeting if the board can not find a resolution. 1 share, 1 vote.
patio11 16y ago
Over and over in business you'll see people avoid decisions they don't deeply understand (e.g. the average VC knows nothing about gaming, the average PHB knows nothing about databases, the average techie knows nothing about your market), and to paper over their ignorance and demonstrate they are in control and providing value they'll suggest a change to something they think they understand (advisor shares, the design of the front page, your pricing relative to a bowl of ramen). This rarely works well, particularly when the two decisions are in fact related. One coping mechanism is being able to ignore advice (if you haven't taken their money, you can probably ignore their advice). Another is having a list of knobs people can twirl which are off the critical path (salaryman survival skill #1: distract the boss with rearranging a Gantt chart which can't kill anyone).
- _pius 16y ago
  Bikeshedding: http://en.wikipedia.org/wiki/Bike_shed http://en.wikipedia.org/wiki/Bike_shed
  - wglb 16y ago
    What Patrick is suggesting is the proactive diversion of the PHB's attention to such issues.
- tamersalama 16y ago
  The Duck technique - http://stackoverflow.com/questions/2349378/new-programming-jargon-you-coined/2444361#2444361 http://stackoverflow.com/questions/2349378/new-programming-j...
- EGreg 16y ago
  Man, applying to YC has got me addicted to this news site a bit :) Before, I used to dismiss it because I thought it flew by too fast. I remember passing by it a few times in the last couple years. If there was only an indicator of something psychologically reassuring for someone like me, I would have bookmarked it. This is the stuff I understand. Technology, web design, psychology of people online, etc. I notice that when I design a business plan, I think in terms of actual use cases from each participant, and why they would do each step. And if there's a missing piece somewhere then that's a red flag. I ask how it would spread virally, or how it would make enough money to spend on user acquisition. This is how I approach business, using what I know. But there's other stuff out there, SEO, guerilla marketing, PR, etc. and I completely avoid it in my designs because I don't know too much about it. That's why it's good to have a partner who can be involved with talking to PR people and marketing agencies and architecting real-world campaigns when the time is right. Whenever there was a problem, I tried to solve it myself using the tools that I know. All my business plans have been of this nature -- sites that are viral by design and get people to spend money by design. Not that it can't work spectacularly, but it's a one-sided, internet-centric approach.
steveklabnik 16y ago
I really enjoyed the personal touch the last sentence and full paragraph added to the story; being able to admit personal failure is an admirable trait, and everyone likes to see the mistakes their heroes make, and not just the successes.
iamwil 16y ago
So the basic premise I get, but as a nascent founder, you haven't seen a lot, so sometimes, you may not know if this is a dime a dozen commodity or an opportunity. I'm wary of fooling myself into thinking most thing's an opportunity rather than a commodity. Besides getting more experience and seeing more, how does one guard against it?
ntoshev 16y ago
So does he mean you shouldn't negotiate opportunities? I don't think this is valid in general.
- btilly 16y ago
  Yes, you need to negotiate opportunities. But an opportunity is where you see value that is not visible to others. If that value is large, then it will pay off in spades even when other people think you're being crazy.
- mkramlich 16y ago
  negotiating can send a signal that you don't value the other entity as highly as they value themselves. it's one thing to negotiate over the price of an apple, say, because the apple doesn't have feelings. but if you try to talk down the compensation package for a potential employee/advisor, particularly one who would likely become a star contributor, you can hurt their feelings and/or cause them to seek employment elsewhere. you can always buy an apple from somebody else, and the store/vendor can always sell that apple you passed over to somebody else. but as a laborer, you have only so many hours in the week you can sell to somebody else, so in general it's in your best interest to get the highest compensation you can. So negotiating as a general rule is good. But in specific cases, where you're dealing with an opportunity or "non-commodity" thing, no, negotiating can sometimes be bad. That was his whole point.
mkramlich 16y ago
great article but I think he failed to make a significant point which was also key to that experience: the failure wasn't so much about treating an opportunity as a commodity but that he failed to follow-through on an offer he has already made and negotiated with the guy and had buy-in from him on. so when he came back to him and said i have to make you a lower offer that moment was going to hurt the other guy. It's not that negotiating itself was wrong, it's that there already seemed to be buy-in from both key parties and then later one side didn't follow though on it. Ouch.
- brianpan 16y ago
  He did follow-through on his first offer. What he wanted, but the VCs did not agree with, was to accept the last email two days prior to the board meeting.
ArturSoler 16y ago
Everything can be overpaid. It seems like he is denying that. I think what he really means to say is to don't negotiate too much where you can have a great profit. In fewer words, not to be penny-wise and pound-foolish.

165 points by icey 16y ago

Interesting how your investors see you bringing this guy on board as an asset but only at a price that they are comfortable with and that might have brought a multiple in value. Makes me wonder how they'll feel about dilution if you ever need to go for more capital. On another note, did you put it to a vote? Do you still hold a majority?

frisco 16y ago
In practice, everything a board does is unanimous. If you respond to you VC board members saying "he is too expensive" with "let's vote on it", the company has WAY deeper problems.
- jacquesm 16y ago
  The bigger problem in this case was that there was consensus about the budget before it was made clear what the goal to be achieved by spending it was. Being in business means being flexible and having a bunch of beancounters on the board that are scared to be diluted is not going to help at all. In such a case stating your case as clearly as you can, possibly in a follow up meeting (because he clearly was not well prepared for this one) would have been much better, also, and that's another critical mistake here, before you approach an outsider you first agree internally that you will do so, and what the budget for that particular outsider is. That could have saved some friction here. A ship has only one captain, if the VCs are on the board they are represented as guardians, but not in a decision making capacity, only an advisory role. Board decision are not nearly always unanimous, and it could very well be that a decision like this is determined during a general shareholders meeting if the board can not find a resolution. 1 share, 1 vote.

patio11 16y ago

Over and over in business you'll see people avoid decisions they don't deeply understand (e.g. the average VC knows nothing about gaming, the average PHB knows nothing about databases, the average techie knows nothing about your market), and to paper over their ignorance and demonstrate they are in control and providing value they'll suggest a change to something they think they understand (advisor shares, the design of the front page, your pricing relative to a bowl of ramen). This rarely works well, particularly when the two decisions are in fact related. One coping mechanism is being able to ignore advice (if you haven't taken their money, you can probably ignore their advice). Another is having a list of knobs people can twirl which are off the critical path (salaryman survival skill #1: distract the boss with rearranging a Gantt chart which can't kill anyone).

_pius 16y ago
Bikeshedding: http://en.wikipedia.org/wiki/Bike_shed http://en.wikipedia.org/wiki/Bike_shed
- wglb 16y ago
  What Patrick is suggesting is the proactive diversion of the PHB's attention to such issues.
tamersalama 16y ago
The Duck technique - http://stackoverflow.com/questions/2349378/new-programming-jargon-you-coined/2444361#2444361 http://stackoverflow.com/questions/2349378/new-programming-j...
EGreg 16y ago
Man, applying to YC has got me addicted to this news site a bit :) Before, I used to dismiss it because I thought it flew by too fast. I remember passing by it a few times in the last couple years. If there was only an indicator of something psychologically reassuring for someone like me, I would have bookmarked it. This is the stuff I understand. Technology, web design, psychology of people online, etc. I notice that when I design a business plan, I think in terms of actual use cases from each participant, and why they would do each step. And if there's a missing piece somewhere then that's a red flag. I ask how it would spread virally, or how it would make enough money to spend on user acquisition. This is how I approach business, using what I know. But there's other stuff out there, SEO, guerilla marketing, PR, etc. and I completely avoid it in my designs because I don't know too much about it. That's why it's good to have a partner who can be involved with talking to PR people and marketing agencies and architecting real-world campaigns when the time is right. Whenever there was a problem, I tried to solve it myself using the tools that I know. All my business plans have been of this nature -- sites that are viral by design and get people to spend money by design. Not that it can't work spectacularly, but it's a one-sided, internet-centric approach.

steveklabnik 16y ago

I really enjoyed the personal touch the last sentence and full paragraph added to the story; being able to admit personal failure is an admirable trait, and everyone likes to see the mistakes their heroes make, and not just the successes.

iamwil 16y ago

So the basic premise I get, but as a nascent founder, you haven't seen a lot, so sometimes, you may not know if this is a dime a dozen commodity or an opportunity. I'm wary of fooling myself into thinking most thing's an opportunity rather than a commodity. Besides getting more experience and seeing more, how does one guard against it?

ntoshev 16y ago

So does he mean you shouldn't negotiate opportunities? I don't think this is valid in general.

btilly 16y ago
Yes, you need to negotiate opportunities. But an opportunity is where you see value that is not visible to others. If that value is large, then it will pay off in spades even when other people think you're being crazy.
mkramlich 16y ago
negotiating can send a signal that you don't value the other entity as highly as they value themselves. it's one thing to negotiate over the price of an apple, say, because the apple doesn't have feelings. but if you try to talk down the compensation package for a potential employee/advisor, particularly one who would likely become a star contributor, you can hurt their feelings and/or cause them to seek employment elsewhere. you can always buy an apple from somebody else, and the store/vendor can always sell that apple you passed over to somebody else. but as a laborer, you have only so many hours in the week you can sell to somebody else, so in general it's in your best interest to get the highest compensation you can. So negotiating as a general rule is good. But in specific cases, where you're dealing with an opportunity or "non-commodity" thing, no, negotiating can sometimes be bad. That was his whole point.

mkramlich 16y ago

great article but I think he failed to make a significant point which was also key to that experience: the failure wasn't so much about treating an opportunity as a commodity but that he failed to follow-through on an offer he has already made and negotiated with the guy and had buy-in from him on. so when he came back to him and said i have to make you a lower offer that moment was going to hurt the other guy. It's not that negotiating itself was wrong, it's that there already seemed to be buy-in from both key parties and then later one side didn't follow though on it. Ouch.

brianpan 16y ago
He did follow-through on his first offer. What he wanted, but the VCs did not agree with, was to accept the last email two days prior to the board meeting.

ArturSoler 16y ago

Everything can be overpaid. It seems like he is denying that. I think what he really means to say is to don't negotiate too much where you can have a great profit. In fewer words, not to be penny-wise and pound-foolish.