I’ve sold two startups, raised four rounds of venture capital, and been through hundreds of negotiations with customers and vendors. Before my first startup, I worked on leveraged buyouts and VC investments at a private equity firm. That’s a lot of negotiations.
Many of them were tough, drawn-out, difficult situations where there wasn’t a clear path to a happy outcome for both sides. On the other hand, some were surprisingly easy. We got to an agreement quickly, strengthened relationships, and both sides came away better off.
In order to help other founders do less of the former and more of the latter, I thought it would be helpful to share my best and worst negotiations and lessons learned.
At Stitch, one of our customers was acquired by a Fortune 100 company with a reputation for hard-nosed negotiations (let’s call them MegaCorp). Our customer had been on a self-serve plan, paying us about $6,000 per year using our clickthrough terms of service.
After the acquisition, our customer told us that MegaCorp had mandated that all vendor contracts needed to be moved onto their paper. That was somewhat annoying, but we saw it as an opportunity and created a bundle including an expanded SLA, custom integrations, and moving onto MegaCorp’s contract. In return for all of that, their annual price would increase more than 4X, to $25,000 per year. Sounds like a win, right?
It was not a win. After we reached an agreement on the business terms, we started a long, painful negotiation with MegaCorp’s legal team.
MegaCorp’s vendor contract template was incredibly one-sided, with all risk saddled on us and all rights belonging to them. It was also one-size-fits-none, where different kinds of vendors were shoehorned into the same agreement. If you’re trying to cover software, venue rental, and catering in the same contract, it’s not going to be a great fit for anything.
OK, it was a bad starting place, but we had a great attorney, and this is what they do. He went to work redlining their template, removing irrelevant clauses and looking for compromises to replace their excessively aggressive positions. It was a huge task, but he knew how important this deal was to us. He processed it within a few days, and then we sent it back to MegaCorp legal. And then, crickets.
It’s not that they said no, they just didn’t say anything. We sent a redlined Word doc into the abyss, and the abyss didn’t seem to care (or even confirm receipt).
After following up a few times, we eventually received a response that they were looking at the contract. Several weeks after that, we received a turn of the contract with almost all of our edits rejected. No explanation, no justification, just a lot of reverts back to the original template.
We asked to get on a call to explain things, and crickets again. We eventually went back to the redlines, and our attorney did a great job of not only trying to use as much of their contract as possible but also leaving detailed comments on the reasons behind his edits. Again, weeks of dead air before a response, and you guessed it, most of the edits were rejected.
It’s worth pointing out that many of the edits being rejected weren’t of the “$5,000,000 vs $100,000 liability cap” variety. There was some of that, but most of the changes were for category errors, like policies for storage and replacement of installation CDs for our cloud-based software.
There was no installation and there were no CDs. We couldn’t promise to make non-existent CDs available to aid in an imaginary reinstallation during disaster recovery after a failure of the local hardware that we didn’t run on. And MegaCorp legal wouldn’t accept the removal of the promise we couldn’t make from their form vendor contract.
Variations on this theme repeated over and over again, with lots of waiting and frustration in between. Eventually, 9 months later, we signed an agreement. While the 4X increase in revenue was great, I wish we had fired this customer right after the acquisition. I’m sure we could have done a better job navigating the situation and maybe even continued to upsell them, but in practice, the process was a nightmare. Our legal bills were through the roof, one of our best account executives was frustrated and distracted, and the deal was impossible to forecast.
Negotiations aren’t always a nightmare. When we went out to raise our seed round for Common Paper, our investors proposed that we use the NVCA model legal docs in the original term sheet they sent us.
Here’s an excerpt from that term sheet:
Both our and our investor’s attorneys had used these docs dozens of times before. On their first call to discuss the deal, they identified the handful of substantive points that they’d be negotiating, and made a plan to resolve them. Over the next few weeks, we reached an agreement that both sides felt great about. For the first time in my career, we even stayed under the cap for legal fees.
That’s it. That’s the whole story of negotiating a $4.5 million fundraise, which took 90% less time than the $25k SaaS deal with an existing customer.
I’ll throw a bonus negotiation in here because the good section is pretty short. I live in Philadelphia, and my wife and I bought a house about a year and a half ago. It was not a $4.5 million deal, but it was my biggest personal purchase by a wide margin.
I reached out to an attorney to help with the negotiation, and he politely declined to take my money. He explained that virtually every house that sells in Philadelphia uses the Standard Agreement for the Sale of Real Estate (ASR), put out by the Pennsylvania realtors association. He’d be happy to explain the contract to me or work on other agreements like a homeowners’ association contract, but the ASR is what it is. Outside of a few variables like price, timing, and deposit, there was no chance we’d be changing anything in the contract.
We came to an agreement with the seller a day after making an offer, signed the ASR, and moved in a few weeks later.
The common theme across the great negotiations was an industry-standard contract. Whether in real estate, startup funding, or other industries, standard contracts improve the process and outcomes for both sides. If the Common Paper Cloud Service Agreement had been an option for our negotiation with MegaCorp, the process could have taken days instead of months.
Common Paper users have seen a 47% reduction in the number of contracts that they sign on the other side’s template. They’ve gotten great feedback from those same companies – standards improve the negotiation process for both sides, with faster closes and reduced risk.