One of the most important rules in any negotiation is to know when to walk away. It sounds obvious. Receive a bad offer or reach an impasse — move on to another deal. But how exactly do you know when to walk away? And how do you know the deal you received isn’t the best offer out there?
Too often, new entrepreneurs rely on instinct to navigate the many negotiations they’ll encounter, but the real secret is to have a backup plan in the form of a best alternative to a negotiated agreement, or BATNA. As the name implies, a BATNA is the best option waiting for you if a deal falls through and it gives you a baseline from which to negotiate from.
David Ciccarelli, co-founder and CEO of audio services company Voices, learned the hard way the importance of thinking through a BATNA. Early in his career, he recalled an experience he had negotiating a contract with a new employee.
What Is BATNA?
The new hire had requested to receive all of their paid vacation time up front instead of accruing it over time, Ciccarelli said. In exchange, they claimed they wouldn’t use any paid time off in the fall or winter. Ciccarelli was in a rush to onboard someone, so he agreed to the candidate’s conditions only to watch them use up all of their PTO and leave the company at the end of summer.
In hindsight, he shouldn’t have been surprised, he said.
“I gave in too early,” Ciccarelli said. “I didn’t fully appreciate my alternatives and just wanted to hire somebody and onboard them fast. Then I paid the consequences.”
Since entrepreneurs are constantly negotiating — whether it’s employee contracts or funding or buying or selling a product — it’s crucial to understand your BATNA and how to wield it. In doing so, it can be a valuable barometer to tell you when you have a good deal in hand and when to walk away.
What Is BATNA?
If you’ve had some success as an entrepreneur, odds are you’ve intuited the need to have backups when you negotiate.
While the concept of having other options when you negotiate isn’t new, it wasn’t until 1981 when Roger Fisher and William Ury laid out the foundations of BATNA in the book Getting to Yes: Negotiating Agreement Without Giving In that it caught on as a formal negotiation strategy.
In the book, Fisher and Ury introduce a strategy called principled negotiation. Instead of haggling over price, this style of negotiating revolves around four key principles:
Removing emotions from a deal by focusing on the issues presented in the negotiation, not the people.
Focusing on structuring a deal around shared interests, rather than trying to “win” it.
Coming up with a variety of deal options.
Evaluating the deal through an objective set of criteria.
Critical to that objective approach is knowing your BATNA. This requires analyzing what you prioritize in a deal and what your options are if your deal doesn’t pan out. It could involve collecting other offers, doing market research to establish reasonable expectations for your deal or figuring out what the other side’s alternatives might be to doing a deal with you. This process helps you establish a realistic baseline for your deal.
“BATNA is what gives you power in a negotiation, which is what gives you leverage.”
If you’re raising a funding round, for example, your BATNA could be set by the best term sheet offered by another venture capitalist firm. Or if you’re selling a product, it could be set by the average market price of your competitor’s products.
In taking the time to assess those options, you’re able to negotiate from a stronger position because you have a plan of action that allows you to step away from a bad deal, explains George Siedel, who’s a business professor at the University of Michigan and host of a Coursera course on BATNA.
“BATNA is what gives you power in a negotiation, which is what gives you leverage,” Siedel said.
Don’t be fooled by its simplicity, however. While it may seem straightforward, it can be easy to overvalue or undervalue your options in a negotiation.
How to Establish Your BATNA
As the founder of multiple startups and an angel investor, Wayne Chang has been on both sides of the negotiating table when it comes to fundraising. One of the biggest mistakes he sees other founders make is underestimating the market demand for their product.
As a result, they undervalue their alternatives and end up with a lower deal than they could’ve landed. It’s an easy problem to fix, but it also shows how important it is to fully vet your BATNA.
“As a founder, that’s an easy mistake to avoid. It’s like, ‘What have your competitor’s been raising? What is the market like? Is there a whole bunch of money on the sidelines waiting to find a home? Or are win a crash and everyone is holding?’” Chang said. “Those adjust your BATNA.”
Before Chang enters any negotiation, he and his team will ask themselves a series of open-ended questions to define their BATNA. These include:
What do we gain most from this deal?
What does the other side gain?
What are some ways both sides can work together?
What advantages do we have? And what advantages do they have?
The first question helps them determine what they value in a deal. A successful negotiation isn’t about trying to win every aspect of the deal, but rather, a dance of give-and-take until both sides find something they value. Identifying what you want to gain from the deal will help you evaluate other offers.
For example, if you’re raising funding, your priority could be raising a lot of money or obtaining a high valuation. But it doesn’t always have to be financial or tangible.
You might decide instead that it’s most important for your company to retain decision-making freedom, so any stipulations that require you to receive funder approval to spend money would be a no-go. Chang said he and his co-founder Jeff Seibert like to prioritize speed and interest to do a deal because those are indicators that the firm is excited to do business with them and will be a better partner.
“We like to create scenarios where it’s about the person at the table … and are they convicted enough to want to come in [and fund us]?” Chang said. “So our BATNA in that case isn’t about money, it’s about the time or intrigue and the speed in which they want to close this deal.”
Once you’ve identified your priorities, it’s important to research the market to figure out realistic alternatives. This could include collecting other offers, reading up on Crunchbase the rounds similar companies have raised and the venture capitalist firm’s portfolio of business. Combined, that information will form your baseline in the negotiation or reservation price, which is the point at which you’d be willing to walk away.
Finally, you’ll want to identify what your counterparty stands to gain from the deal. This will help you figure out what you might have to give up to find a deal that’s advantageous to both of you, Chang said.
“When we start answering those questions, those beget even more questions and that helps us solidify in our own side all of the data,” Chang said. “And that helps us navigate the negotiation.”
Of course, even the most rigorous analysis can be derailed by what Siedel, the business professor, calls the “overconfidence trap,” or thinking your alternative offer is better than it is.
Just because you saw a competitor raise $20 million when the average is $10 million, doesn’t mean it’s realistic to expect a high-end amount as an alternative. He recommends finding someone you trust to poke holes in what you think is your best alternative option.
“It really helps to have disconfirming evidence and that is to have everything challenged by your associates,” Siedel said.
How to Figure Out Your Opponent’s BATNA
While it’s important to figure out your own BATNA first, the strongest negotiators are the ones who are also able to find out their opponent’s alternative over the course of the negotiation.
Negotiations aren’t a one-way street and your opponent will likely have backup plans as well. Taking the time to home in on what their BATNA is will allow you to identify the ground rules to the negotiation, Chang said. You’ll be able to determine who has the strongest negotiating position and what factors you might be able to leverage to make your deal better.
So, how do you identify your opponent’s BATNA?
If they’re in a strong position, they may just come right out and tell you, Siedel said. For example, if you’re an auto parts supplier selling to Ford in Detroit, they’ll likely have several alternatives to you and won’t be shy about leveraging that information with you.
“The basic rule of thumb is if you have a strong BATNA, why not disclose it? It tells the other side you’re powerful,” Siedel said. “If you’ve got a weak BATNA, then you want to try and hide it.”
In most cases, though, your opponent will likely only hint at their BATNA to make it sound stronger than it is. That’s where research and discovery come into play. Before you go into a negotiation, review past deals your counterpart has completed, what the competitive landscape looks like and what they stand to gain from doing a deal with you.
“The basic rule of thumb is if you have a strong BATNA, why not disclose it? It tells the other side you’re powerful. ... If you’ve got a weak BATNA, then you want to try and hide it.”
Once conversations start, Ciccarelli, who’s the co-founder of Voices, tries to ask as many questions as he can. In a hiring scenario, he might ask the candidate what other companies they’ve interviewed with and what the job market has been like for them. If it’s funding, he might ask what a typical portfolio company looks like, how much they invested in them and what their revenue is like.
“The more questions you ask, your counterparty is speaking and they’re divulging information you can use to better position your offering or discover what is important and meaningful to them and what isn’t,” Ciccarelli said.
At the end of any conversation, however, he always makes sure to ask: “Is there anything I haven’t asked you that I probably should have?” This gives the other party the opportunity to share any other important factors to them so you can both negotiate in good faith.
“There’s nothing worse than being in the late stages of a negotiation and then the other side is throwing out a particular deal point that you had no idea was a deal breaker for them,” Ciccarelli said.
Identifying your opponent’s BATNA isn’t just about collecting facts and data. The speed and tone of your opponent’s responses can also tell you a lot about their negotiating position, Chang said. If they send a fast response or denote eagerness, it could be a sign that you’re in a stronger negotiating position.
“In reality, negotiation is both sides signaling to each other what they think the other’s BATNA is and sort of cajoling or threatening to leave the negotiation table to suss out the other’s BATNA,” Chang said. “If you withhold your BATNA, sense those signals and play the game well, you’ll probably come out ahead in the negotiations.”
Wielding Your BATNA in Negotiation
When Chang first started negotiating, he did everything by the book. He’d focus on fine-tuning every line of the contract, when each line would trigger and what would go into effect when.
While the structure of a contract is important in any negotiation, he realized that the key to a successful deal isn’t analyzing every line but winning the psychological back and forth. By drumming up excitement and negotiating from a strong position, you can get a better deal. And that’s where BATNA comes in, Chang said.
“[BATNA] is just as much data driven as it is psychology driven,” Chang said. “It gives you a great line in the sand to start negotiating.”
To wield your BATNA, your goal should be to answer three basic questions:
Can you identify your opponent’s BATNA?
Is there a way you can weaken their BATNA?
Is there a way you can strengthen your own BATNA?
In order to weaken their BATNA, Siedel suggests thinking through your opponent’s priorities and then shifting the conversation to focus on your strengths. If you’re selling a product and the buyer claims they can get a better price elsewhere, you might be able to highlight your product’s quality or the length of contract you’re able to offer.
You can also strengthen your position by seeking out other deals and focusing the conversation on those options. When Chang raises funding, he doesn’t like to give up the amount he wants to raise. Otherwise, the conversation becomes analytical, requiring Chang to prove the company’s worthiness, he said.
“[BATNA] is just as much data driven as it is psychology driven. It gives you a great line in the sand to start negotiating.”
Instead, he seeks to build excitement by playing offers off each other.
“We can send these signals out there that there are offers coming in and it’s a hot deal,” Chang said. “Then we can solicit those offers, in which we can then play it back to them.”
There’s also power in a well-timed pause in the conversation or a toned down email response, Chang said. If you tell the counterparty you’re sure one of their demands will be fine and not to worry, it’ll encourage them to ask for more. Instead, signal to them that you’ll see what you can do but that it’s OK to walk away. Doing so can make your BATNA seem stronger.
The most important thing in any negotiation is to stick to your BATNA.
When Twitter reached out to Chang and Seibert to acquire their previous company, Crashlytics, for $30 million, they used their BATNA to negotiate from a position of strength. Based on their past acquisition experience, the stability of their company and their ambitions, they countered the offer.
“We said, ‘That’s too low.’ That did not meet our standards,” Chang said. “We communicated to them that Jeff [Seibert] and I had prior successes and what was really important to us was nine figures. That’s how we came to our BATNA, and so they understood that and they met it.”
Still, BATNA alone can’t tell you when you have a great deal. It’s just a baseline. You should also consider what your stretch goal is and what a realistic offer looks like, Siedel said. This creates your zone of potential agreement, or ZOPA, which defines the range of deals that you will likely consider.
Ultimately, every negotiation is won or lost based on the work you put in before the deal, Chang said. Take the time to understand your BATNA, and you’ll have a head start.