Consider Your BATNA

Deep into a critical negotiation, how far do you go? What risks do you take? How should you think about your possible positions? These are essential questions that a startup leader must navigate in myriad scenarios – and BATNA is one of the most potent tools for deciding what to do.

When negotiating an agreement of some sort (fundraising round, client agreement, supplier contract, real estate lease, equipment purchase, employment agreement, legal settlement, etc.), your negotiating power is directly related to the alternatives you have available to you. BATNA stands for Best Alternative To a Negotiated Agreement, and as a concept, it invites you to explicitly consider what and how good your alternatives are. BATNA captures, in essence, the power of your next best option versus whatever is currently on the table. Of course, you can have more than one, and multiple strong alternatives only strengthen your position.

BATNA Example #1: Can You Live With The Downside?

While I was introduced to the concept of BATNA as part of my MBA education, I did not grasp the power of this tool until I was faced with a frustrating and challenging situation in 2001. Back before I entered the hothouse world of startups, I was a management consultant working with large Fortune 50, medium, and second-stage companies across various industries. I was good at it – earning four promotions over eight years and leading over 35 different projects at 25 different companies – but eventually, I grew tired of the 100% travel and advisory role of a consultant.

One of my clients wanted to hire me onto his executive team. When I approached the leadership of my consulting company to discuss my departure, to my surprise, the firm’s founder and the current CEO went after me. Even though consultants going to work for clients had been routinely approved for my peers, the leaders I had worked hard for now wanted to enforce a non-compete on me.  But they were threatening me, threatening my client, and demanding that I stay at the consulting firm. I felt betrayed and backed into a corner. I did not know what to do.

A friend referred me to a top-of-the-line attorney for advice. In an hour-long phone consult, I laid out all the facts – and he demonstrated why he was so good at his craft. He listened carefully and then cut to the heart of the matter when he asked me to think about the “worst-case scenario” and ask myself, “Can I live with it?” Even though, in theory, I could fight them in court, practically, I had no good BATNA because I could not afford to go to war with them even though I wanted to. While it wasn’t what I wanted, since I could not live with the downside alternative, I came to grips with the idea that I had to be less aggressive than I wished because we did not have a good negotiating position because they were threatening to tank my client’s fundraising round. In the end, I thanked my client, wished him well, and returned to my consulting job. Then, I let them pay me for six months while I found another opportunity.

BATNA Example #2: What Can You Do With The Negotiating Power of Having Competing Term Sheets?

I was raising a priced equity round of financing for my startup. Fortunately, I successfully enticed two different lead investors to put competing term sheets on the table. After carefully making sure not to reveal who the alternative was to either of them (which they would likely have taken advantage of by backchanneling around me), I was in a position where I could think about my BATNA for each offer. Having a good alternative made my negotiating position much more robust and put the lead investors in a competitive state of mind. I was able to use the existence of a credible BATNA to argue for better terms. Ultimately, this allowed me to get a better deal for our existing investors because when you have a strong BATNA, you can confidently negotiate, knowing that you can fall back on your second choice (assuming it is reasonable!) if you need to.

BATNA Example #3: Are You Certain You Do Not Have A Better Lead Customer Candidate?

Early on, when a startup is beginning its commercialization journey, finding a creative innovator who wants to be your “first customer” is often a huge challenge. There is risk in being first and trying something new. So, that often means that the startup CEO, who typically closes the first sales, has some sort of relationship with the potential first customer(s) that provides that extra connection and trust to take a chance. Still, even in this situation, as a startup leader, you hopefully can generate more than one possible first customer so that you have good BATNAs as you are negotiating to get to the combination of risk-reducers and value proposition that will entice your first customer(s) to take the plunge.

I have faced such situations myself several times – and recently, I was helping a first-time founder think through his early customer options when one of his close relationships seemed inclined to take advantage and push for many “extra” benefits rather than finding a balanced win-win. The negotiation became unbalanced enough that we had to start really considering if this potential lead customer was actually worth it – and who might be an alternative BATNA customer – because “giving away the store” to first customers can ruin your credibility on the fundraising front when you are trying to prove your new product’s value proposition to potential investors.

BATNA Example #4: Do You Have Any Alternative Prospects for a Lead Investor?

Once, I had a first-time CEO who was raising money reach out to me on LinkedIn.  He was negotiating a term sheet with a particular VC investor from whom I have raised money. Of course, as always, I try to help other CEOs – and give them the straight scoop about investors I have worked with.  After I shared my experiences with this VC, I asked him a final question: Do you have any other term sheets or potential term sheets for the large venture round you are raising?  Knowing how challenging the current fundraising environment was, I was not surprised when he said no. Because he had no real BATNA prospects, I said that I knew he was likely to take the deal and make the best of it despite the current situation’s imperfections.  The reality is that round would be transformational for his company — and therefore, POTENTIALLY worth a fair amount of pain. I wish I could say that this situation was unique, but it is far more common than founders would wish. Sometimes, you have to focus your eyes on the big picture and what you can do with the funding to create success despite the downsides to the deal on the table.

Tips for Applying BATNA Effectively

Here are some tips for effectively applying the idea of BATNA to your startup negotiations:

• Be intentional about considering your BATNA alternatives when engaged in a negotiation. This mental discipline encourages you to take a step back and consider the situation you are in more holistically and less emotionally.
  
  
• Ask others on your team what they think might be potential BATNAs in the negotiations. Perhaps someone else can spot an angle that has not occurred to you yet. Fleshing out the elements of alternative paths provides valuable insights and perhaps even some new ideas for approaching the negotiation you are engaged in.
  
  
• When considering your BATNA, consider the “Can you live with the downside?” question carefully. If you can’t, you should seriously consider accepting the offer on the table.  
  
  
• Remember that if what you are working toward is critical – and there are no excellent BATNAs available – you may need to accept a lesser deal. If that happens, going through the process of explicitly considering your BATNAs gives you a basis for explaining to others on your side of the table (Board members? Co-founders? Team members?) the relative strength or weakness of your position.
  
  
• Be empowered as you consider your array of options. Only you and your team can evaluate the relative value of the potential upsides versus downsides in your present circumstances.

Negotiating critically important deals is part of building a successful startup. The process is never easy, and your options drive your negotiating leverage and how much risk you can afford to take. Make sure you are thoughtful and intentional about considering the implications, options, and possibilities as you navigate these situations. Use BATNA as a powerful tool to understand where your limits should be.