Negotiation: What every entrepreneur should know to ace it

Image: London Business School/ Sheila Burnett

Tell us about the ‘Dilution Effect’. How does this impact the outcome of an entrepreneurial negotiation?

The Dilution Effect describes a phenomenon where attempts to be persuasive backfire. When a communicator bombards their audience with multiple arguments, especially weak ones, the overall message loses strength.

This can be further explained by the ‘law of averages’. Imagine four arguments: two strong (90/100) and two weak (60/100). The average strength becomes 75 (300 total/ four arguments). However, focusing on the two strongest arguments (180 total/ two arguments) yields a score of 90.

This is particularly relevant in fundraising pitches where entrepreneurs list endless reasons to invest. By the time you reach the weaker points, the impact of your strongest arguments has diminished.

How can you manage the transactional dynamics of a negotiation from a socio-psychological perspective?

Negotiation is about managing the socio-psychological dynamics and structural pillars that guide the process.  For instance, a huge element is considering your counterpart’s perspective.  The more time you spend preparing for a negotiation, not just from your perspective, but also from your counterpart’s (while considering their alternatives, strengths and underlying interests) is crucial.

This approach leads to better outcomes in the value created and claimed at the bargaining table.

What is the worst possible way a negotiation can play out, and how does one navigate this systematically?

Lack of planning is perhaps the single greatest misstep you can take. Negotiation is based on the 80/20 principle – 80 per cent is systematic preparation and 20 per cent is the execution of that preparation.

Never underestimate the time and effort experienced negotiators spend mapping out the structural and psychological underpinnings driving the negotiation.

In the face of geopolitical and economic uncertainty, how does one keep the drumbeat of their negotiations strong?

When there is uncertainty and external pressures, it is natural to become more egocentric, focusing inward. In such situations, it’s even more crucial to focus on interests rather than positions at the bargaining table.

With the pressures of uncertainties, it is common for both negotiating parties to further marry into their entrenched positions.

By understanding the underlying interests and motivations of the other party, you increase the likelihood of finding overlapping interests, creative solutions and win-win outcomes.

How can you master a negotiation?

Negotiation is a critical tool in an entrepreneur’s toolkit. To support your business venture, you must negotiate to secure funding and potential clients. Additionally, you must align with contractors and suppliers while building strong working relationships with co-founders and workers.

One of the basic skills that an entrepreneur needs to master is to listen more and talk less.

A big difference between novice and expert negotiators is that inexperienced negotiators talk too much and listen far too little.

Knowing the right questions to ask, how to distill what you have heard down to the central components, what calculus you use on that information and how to mobilise it to get outcomes that bring value to you and your counterpart is key.

What is the best strategy for aligning your business plan with the demands of private capital fund investors?

Entrepreneurs often fixate on valuation at the expense of other crucial factors that have long-term value in helping scale and finally, exiting at favourable terms.

When a private equity, venture capital, or private capital investor believes the valuation is unreasonably high, they will incorporate a control mechanism to help mitigate what they view as unreasonable risk. While these controls might seem acceptable in the short term, they can hinder your operational freedom and future exit options.

It is important to note that almost all elements you negotiate with a private capital investor will fall under two categories: financial and control.  Turning up the dial on one will invariably come at the cost of the other.

It is important to keep this in mind in your preparation.

Professor Sivanathan teaches negotiations and decision-making to a wide audience, as well as the new executive education course ‘Private Equity Negotiations’ at London Business School.