Posted: June 21, 2013
Take the range out of your deals
Why look uncertain from the get-go?Brad Feld
I was fortunate that two of my early mentors were master dealmakers. They had different styles and approaches so I learned an incredible amount from each of them. Before I met them, I’d never made an investment, acquired a company or sold a company. In the years since I met them, I’ve done a ton of each.
React to the following:
“We’d like to buy your company for between $35 million and $50 million.” That means $50 million to you, right?
“We’d like to invest between $5 million and $7 million at a valuation of between $10 million and $15 million.” That means a post-money valuation of $22 million to you, right?
Or what do you think when someone says “about $10 million” instead of “between $9 million and $11 million”?
Given the extensive negotiation theory that exists, I’ve never understood why people talk in ranges when they are proposing a deal. While I understand the hesitancy of many to put the first number out there, I’ve never understood why this often translates into a range. When you put the range out there, you are by definition showing your negotiation flexibility at the very beginning of the negotiation.
While I understand that some people will assert that the range softens up the first volley in a negotiation and also indicates what the negotiating range might be, everyone I know who is a strong negotiator ignores the range and views the starting point as whatever number is most advantageous to them. All the range ends up doing is reinforcing that the range-giver is tentative and uncertain about their starting position.
Now, let’s translate this into something useful for the entrepreneur raising money. If you tell me you are raising $3 million to $5 million, then I don’t really know what you need (or want) to raise since there is a big gap between the two. Instead, if you tell me you are raising $3 million, then I can have a discussion with you about how much I think you should actually raise. And if you have more demand than expected, you can always raise more.
So, before tossing out a range in any negotiation, think again about the starting position you are trying to establish.
Brad has been an early stage investor and entrepreneur for more than 20 years. Prior to co-founding the Boulder-based Foundry Group, he co-founded Mobius Venture Capital and Intensity Ventures, a company that helped launch and operate software companies. Brad is a nationally recognized speaker on the topics of venture capital investing and entrepreneurship and writes widely read and well respected blogs at www.feld.com and www.askthevc.com. He holds bachelor's and master's of science degrees from from MIT. Contact him at firstname.lastname@example.org