Negotiation skills are valuable in multiple situations, from haggling over the price of a car to trying to get a raise. Writer and investor James Altucher offers several lessons in how to negotiate, including one uncommon one: have a mathematical formula.Image by Dylan NG.
He writes about trying to sell his company to Steve Elkes, former iVillage COO, and how Elkes used a simple formula at the beginning of the negotiation to form the basis of the deal — a formula seemingly so simple that Altucher agreed to it:
He said, “Look, thestreet trades for 20x earnings. So the Board will agree to something half of that so the deal is immediately accretive.” I nodded my head. Made sense. I said, “let’s use next year’s earnings.” He agreed. Seemed simple. Steve said, “So we’ll take all of your ad inventory, take your expected users based on your current growth, use our CPM (cost per thousand impressions) since we will fill up your ad inventory, and then subtract out your expenses, which is really just your salary, and there we have your earnings and we’ll multiply that by 10.”
Simple formula. I nodded my head. He had already used one simple sub-trick against me which is not worth an entire bullet point but worth a mini bullet: “THE BOARD”. So suddenly it wasn’t me negotiating AGAINST Steve — he had an invisible backup in a worst case scenario. He put the element of fear in me. Some mysterious force, “the board” could be erratic or foolhardy at the last minute so he WOULD HELP ME by coming up with this simple formula that the mysterious, and perhaps dangerous, board, would easily agree.
So, the formula sounded like it made total common sense. Particularly since it seemed like he was on my side against “the Board”. I agreed. I immediately started adding up my numbers and thestreet’s CPM was common knowledge in their SEC filings. We agreed to meet in a couple of days while he “researched” what the CPM was and looked at my traffic numbers. All negotiators act dumb at first and as they “increase their knowledge” you inevitably get screwed.
What Elkes did was leave a few variables open in the formula (the CPM and expenses) that he could manipulate:
We met again in a couple of days. This time he had the head of ad sales with him. Steve said, “I don’t know all these numbers myself but Tom can explain them.” This is another sub-point, ALWAYS ACT STUPID and defer to experts that everyone agrees is an expert. In other words, you are outsourcing the hard parts of the negotiation so you can remain “friends” with the other side.
Tom said, “The SEC filings say we get a $US16 CPM but that’s wrong. We give away a lot of free ad inventory and we have sponsorships on specific sites so you have to subtract that from the $US16. It’s really more like a $US7 CPM.” Since I had already agreed to the “formula” that was the basis of the negotiation I was stuck trying to figure out if that $US7 was real or if he was BS-ing me. But we spent an hour looking at it in every which way and $US7 CPM was the number.
So I had to nod my head again.
Then Steve said, “and you really have other expenses: we’ll provide an office, insurance but let’s just focus on your salary as the expenses.” Uh-oh! He was giving me nickels to take the dimes! But he got me to feeling a sigh of relief to set me up for the fall.
“And some of your traffic growth simply comes from us sending you traffic so if we didn’t buy you you wouldn’t have that growth. We would just send that traffic elsewhere. So we have to discount that slightly.”
So in the end, because he agreed to the formula at the start:
By this point I was so eager to just agree to anything. I just wanted to plug the right numbers into the formula we had decided on. All the calculations I had been doing on my own went right out the window.
“So I guess the number is X”, he said.
And X it was. Since that’s what the formula spit out. About 1/3 of what I thought I was going to get but I had agreed to the formula. Touche, Steve.
The good side of that negotiation is that from that point, the entire deal closed in a week. The fastest I’ve ever seen a deal close. So I felt good about that.
The takeaway is to start with a formula that everyone can agree on, then chip away at some of the variables as you negotiate. Also note the two other tips: using an invisible third party (e.g. “THE BOARD” or you could use your partner as that invisible backup) and playing dumb and deferring to an expert on your side. Check out the other two lessons at Altucher Confidential; it’s a really great read. What are your negotiation techniques?
How to Negotiate in Three Easy Lessons [The Altucher Confidential]