Santiago Bilinkis l Risk and Reward - Trying to live a life out of the comfort zone

A few days ago I received a question from an entrepreneur called Nicolás Millaner, who asked what are the key areas to “take a hard stance” when negotiating with an investor. I thought it was a good idea to post my reply here because I believe it can be useful to others as well.

Obviously, the question is very broad and does not admit a simple answer. But there are certain general comments I want to make.

One of the most common errors made by entrepreneurs (and also some investors!) is to focus on splitting the cake as if the only variable was the premoney valuation and the only relevant value was economic. In reality, the negotiation is a lot more complex than that. To me, the four key areas to consider are:

1) the economic value split,

2) the political power split (the decision making and the company´s governance),

3) the different parties’ interests alignment,

4) the handling of potential conflicts.

Clearly you want to maximize your value and power, while keeping interests aligned and being protected. Your counterparts want exactly the opposite, with the exception of the interest alignment where both want the same (though many times the parts disregard this area and end up doing things that are bad for all).
In a zero-sum situation, the only way to make progress is by making trade-offs (I give you this but you give me that). How much weight to give to each of these variables is not a matter of science but an art!

It is also important to consider that:

a) The economic value and political power splits do not need to be equal. There are tools to give up over 50% of the shares (the economic value) keeping the decision making and viceversa. Preferred shares and multiple-vote shares allow to separate these discussions, if necessary.

b) Even if they can be separated, almost always a political right (as the right to veto a certain decision) can be used when the time comes to obtain economic value, by simply demanding an economic compensation not to use the right to veto. Sounds ugly, but it is legal and a not so infrequent practice.

c) Contracts are written for when conflict arises. When everything does well, no one ever reads them again. And when both parties are negotiating in good will, it sounds a little awkward to spend time discussing how to handle the conflictive scenarios. But it is essential to do it and do it well. If at any time things turn sour, everyone goes back to read what was written and those are the rules that govern how the conflict is resolved.

Imagen: Griffinross