(Part 1 of 3)
Dear ____ and Hai,
Thank you for responding to our proposal. Unfortunately, your counterproposal does not meet our investment criteria so we are withdrawing our offer.
We wish you success in landing this funding.
With that brief note, the fund manager, someone whom I shall not name, withdrew his financing offer, a combination of debt and royalty valued at $40 million, to our client.
This was a sudden, completely unexpected development.
I was shocked. I remember staring at the computer screen thinking, Oh, something’s not right. How am I going to get things back on track?
As much as I would like to say, “Ah well, what’s the use? Let’s move on,” I didn’t have that luxury. That was the only term sheet on the table at the time for our client. It was imperative to get him to come back to the table. (The balance of power would shift a few weeks later with offers from other investors, but that’s another story.)
A PROMISING START DERAILED
For a few weeks after the initial conference call between our client and the fund, the desktop due diligence was going well. Questions and answers were flying back and forth between the two sides. There was no fatal flaw uncovered. No red flag. Everything was smooth-sailing which then culminated in the first term sheet.
At the rate things were moving, I had the impression the financing would close in less than three months which would be very quick considering a site visit would be required.
Below were the key terms offered by the investor:
• A $30 million convertible debt compounded at 15% per annum.
• Quarterly principal + interest rate repayment.
• An initial 10% gross royalty valued at $10 million.
Our client’s counterproposal consisted of the following elements:
• $40 million debt compounded at 12%.
• Annual principal + interest repayment.
• Right to redeem the debt early.
The counter offer was sent to him by Friday evening and early Sunday morning, he fired off the above-mentioned note.
This move on his part caught everyone on our side by complete surprise. From my client’s point of view, their counteroffer was a completely normal part of the bargaining process.
Was the withdrawal a calculated, aggressive negotiation tactic to throw us off balance or was it the manifestation of something deeper that may or may not have anything to do our client’s counteroffer?
What would you say to convince this fund manager to change his mind? And when would you say it?
BRING THE HIDDEN EMOTIONAL OBSTACLES TO LIGHT
The road to deal is paved with unexploded landmines – hidden issues and emotions that need to be removed before one successfully reaches the final destination.
People think they are rational, but beneath the surface, they are not. They are heavily influenced by emotions.
Dale Carnegie, the American author of How to Win Friends and Influence People said, “When dealing with people, let us remember we are not dealing with creatures of logic. We are dealing with creatures of emotion, creatures bristling with prejudices and motivated by pride and vanity.”
Everyone has those unarticulated emotions and hidden issues that they are reluctant to talk about for whatever reasons. Sometimes they are not even aware they have them. So if you can bring them to the open by vocalizing their fears and concerns, you’re more likely to keep the other side calm and negotiation on track.
And if you don’t? Sooner or later, you’ll hit an impasse.
This technique is what I call “acknowledging the elephant in the room.”
Chris Voss, former FBI hostage negotiator and author of Never Split the Difference: Negotiating as If Your Life Depends on It, calls this approach “tactical empathy.”
Why empathy? It demonstrates your understanding of the unspoken issues that are of concern to them. When you’re able to do that, they become more relaxed and then they can take what you say more seriously.
Voss suggests using neutral statements such as:
It seems like …
It sounds like …
It looks like…
…followed by what you think is the emotional or some unresolved issue lurking beneath the surface.
He suggests you make the statement and then wait for the other person to respond.
Notice that he doesn’t suggest using the first or second person pronouns such as “I” and “You.” Depending on the context, starting a statement with “you” can put the other person on the defensive.
Skeptical? Try this technique out the next time you’re confronted by or are with an angry person. Say, It seems you’re really angry right now. Then pause.
Observe the change in the demeanour of the person. Just by acknowledging the obvious in a neutral, non-accusatory manner has the potential to lower the emotional temperature of the moment immediately.
Ask any psychiatrist, clinical counselling psychologist, crisis hotline volunteer or trained hostage negotiator the name of the above technique and he/she will tell you it is one of the active listening techniques to draw out and validate the feelings of the other side.
(Next: The most common mistake untrained negotiators make.)
