Contract Negotiation

This article is written by Ramanuj Mukherjee, CEO of LawSikho.com and Rounak Chaki, researcher at iPleaders.

You may think that contracts are the domain of lawyers, but one rarely succeed in business without being a good negotiator of contracts or without the ability to understand what is the impact of a simple looking clause on the future of a business. Many creators and innovators have a short life as a business owner when they fall short on this count. Take for example, how the Mcdonald’s brothers were ousted from their own business as someone else hijacked it from under their nose. They even made a movie about it.

In 2016, my team was working on a contract drafting and negotiation course, and we knew it would be popular with lawyers and law students. However, is it a good idea to build a negotiation course for business leaders, CEOs, managers? That is when we first started researching on famous business leaders and the role contract negotiations played in their life. As I spoke to more and more founders, investors and business owners, I was convinced that it is a necessity though it is not immediately obvious to most people. In a short time, we stumbled on a gold mine of case studies.

If you didn’t realise that contract negotiation is an essential skill for a business leader, let us give you 5 shiny and famous examples from the Silicon Valley.

#1 Steve Jobs

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Steve Jobs was without doubt, the face of technological innovation. His ideas singlehandedly shaped up the gadget industry for the last two decades and made Apple the biggest corporation ever known. His ability to project faith in what may seem to be the most ludicrous ideas at the time, have now become the fables of modern technology.

Steve Jobs was not just as a pioneering inventor but a fierce negotiator. Who can forget the frenzied anti-trust proceedings against Apple in 2010? But before all of that, came the negotiation skills of one Steve Jobs, to make sure that a reluctant HarperCollins was part of the ibookstore bandwagon. This is by no means the most famous negotiation led by Jobs, but a pretty good indication anyway.

Apple’s negotiations with HarperCollins

This incident happened during negotiations between Apple and News Corp owned HarperCollins over a deal to sell their eBooks on Apple’s iTunes store. Apple was on its way to launch the iPad in five days and HarperCollins was holding off from signing the deal. What happened in those five days, is a masterclass in negotiation.

Eddie Cue, Apple’s head of iTunes had been handling the negotiations and five days before the iPad’s launch, HarperCollins sent in its’ opening bid. It was completely different from the contracts that Apple had already negotiated with Penguin, Simon & Schuster, Macmillan and Hachette Book Group – basically all the other big publishers. James Murdoch, then the executive chairman of News Corp (which owned HarperCollins) decided to mail Steve Jobs directly, to back up HC’s position. He mentioned the legitimate concerns that HarperCollins had regarding the deal. He was very specific about the effect holding back their eBooks on Amazon might have and the increase in the pricing structure. He expected Apple to be flexible as HarperCollins did indeed wish to collaborate with all of Apple’s endeavours than stay out.

Jobs on the other hand was not willing to compromise. He sent his reply to Murdoch the very same day. Jobs argued that Amazon’s pricing was not reliable and would instil a wrong belief in people that eBooks are cheap. He reiterated that sales of the iPad in the very first few weeks, would outmatch all the kindles that had ever been sold. HarperCollins’ not agreeing to the deal in time, would mean sitting out of the mainstream eBook revolution. He opened up the conversation to statistics of total Apple users, over 120 million with credit cards on file. Jobs was making sure that Murdoch didn’t forget the sheer vastness of the market that Apple would be opening them up to. In short, it was as if Jobs was saying, “You need us more than we need you!”

Jobs had made it very clear that Apple would not budge. And in his subsequent reply, Murdoch indicated that he might. He proposed a couple of compromises and noted that Apple and News Corp were negotiating on multiple fronts, they could just take a step back, reevaluate and finish the negotiations over the subsequent weeks or months.

Steve Jobs picked up on the compromising tone. Now, armed with the knowledge that HarperCollins might be open to making the necessary changes, he just went for the kill. This is the mail that he sent the following day.

James,

Our proposal does set the upper limit for eBook retail pricing based on the hardcover price of each book. The reason we are doing this is that, with our experience selling a lot of content online, we simply don’t think the eBook market can be successful with pricing higher than $12.99 or $14.99. Heck, Amazon is selling these books at $9.99, and who knows, maybe they are right and we will fail even at $12.99. But we’re willing to try at the prices we’ve proposed. We are not willing to try at higher prices because we are pretty sure we’ll all fail.

As I see it, HC has the following choices:

1. Throw in with Apple and see if we can all make a go of this to create a real mainstream eBooks market at $12.99 and $14.99.

2. Keep going with Amazon at $9.99. You will make a bit more money in the short term, but in the medium term Amazon will tell you they will be paying you 70% of $9.99. They have shareholders too.

3. Hold back your books from Amazon. Without a way for customers to buy your eBooks, they will steal them. This will be the start of piracy and once started there will be no stopping it. Trust me, I’ve seen this happen with my own eyes.

Maybe I’m missing something, but I don’t see any other alternatives. Do you?

Regards,

Steve

Email Sourced from here.

He was almost daring Murdoch to spurn Apple, knowing very well that given the market that the iPad would create for multimedia consumption, they couldn’t afford to. It invariably shows Jobs at the height of his critical and analytical thinking, willing to make the extra time to personally get into the discourse when necessary.

HarperCollins agreed to Apple’s terms and signed the contract the very next day. It was part of Jobs’ presentation about the iBookstore a day later, at the iPad launch event.

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Jobs in his lifetime faced a lot of ugly situations. Be it the unceremonious firing from Apple in 1985 or the myriad of public fallouts from his personal life choices. At the end of it all, he always managed to come out on top. Ousted out of Apple? Built NeXT and sold it for $429 million. Bought Pixar, a relatively unknown hardware manufacturing company at a mere $5 million and turned it into a computer graphics generated animation studio that made him billions. That is how he went forward. By making sure, he always had an alternative prepared and ready to proceed with.

#2 Mark Zuckerberg

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Mark Zuckerberg can be credited as one of the pall bearers of the social media movement since the fall of AOL. At 33, Zuckerberg is the fifth richest man in the world with total assets valued at $71.5 billion. Most of his business acumen comes from his ability to adapt to suit his needs. A lot can be said about the man, but what matters the most is his incredible sense of timing and judgment regarding innovations and the people behind them. As the Founder and CEO of Facebook, he has shown considerable skills in negotiating for his company and keeping its interests above all.

This particular incident marks his unbelievable negotiating skills. Facebook’s acquisition of Instagram which was negotiated over a long weekend.

Facebook’s acquisition of Instagram

Mark Zuckerberg had been looking to expand. It was necessary to update the site to keep up with the younger audience. As it turned out, Zuckerberg already had the answer. Kevin Systrom the CEO of Instagram.

According to a Times report, Kevin Systrom first caught Zuckerberg’s attention in 2004. He was very impressed by Systrom’s Photobox service, which allowed people to send and receive large photo files. He offered Systrom a job at Facebook but was turned down. Systrom then a college student, wanted to finish his studies.

Systrom then went on to create Instagram with Mike Krieger, which created ripples in the tech wave. In early 2011, Zuckerberg offered to buy them out but Systrom chose to focus on individual expansion. Cut to 2012. Instagram was less than two years old. The company had no revenue and employed only a dozen people, yet it was riding a meteoric high. It had over thirty million users, who were uploading over five million photographs everyday.

Zuckerberg had been patient all those years. Waiting for Systrom to find his way to him. He wanted their business collaboration to come from a place of genuine faith. And as it happened that moment came. In April 2012, Instagram had just finished an impressive round of funding that valued the company at $500 million. Zuckerberg knew he had to act now or risk losing out on a great business. He was sure that bringing in a team of lawyers might make the Instagram CEO turn down any deal.

Zuckerberg invited Systrom over to his house. Over food and wine, he made Systrom a proposal to buy out Instagram. He wanted to make sure that Instagram continued to operate independently, but as a part of the expanding Facebook business. Systrom was initially taken aback, but ended up countering him. Both of them continued negotiating over the next three days at Zuckerberg’s Palo Alto home. Systrom asked for $2 billion but was promptly turned down. Zuckerberg didn’t want to make a business deal, he wanted to make an addition. He wished for people like Systrom and a great innovation like Instagram, to work with him. In the end they scaled down the price to $1 billion in cash and stocks.

The next morning, Zuckerberg walked up to his board and told them of his decision to buy Instagram. Not a choice, but a decision. No one at Facebook outside of COO Sheryl Sandberg even knew about Zuckerberg approaching Systrom to sell them Instagram.

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Systrom went home, talked to his co-founder Mike Krieger and twenty four hours later, the contracts were signed and the deal was finalised. Instagram now belongs to Facebook and Kevin Systrom, CEO of Instagram is a board member of Facebook.

Mark Zuckerberg sees the quality in people that tend to stand out. He makes more of an investment in people than the products they represent. Patience, perseverance and that kind of genuine goodwill is a key factor in any negotiation. Mark Zuckerberg symbolizes them all.

#3 Reid Hoffman and Jeff Weiner (LinkedIn)

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Reid Hoffman and Jeff Weiner were instrumental in crafting LinkedIn’s niche in the world.

Reid understands that even in a deal which is mutually beneficial, there might be misaligned objectives with regards to some key points. This he mentioned to Ben Casnocha, Silicon Valley based entrepreneur, author, executive, and investor when they were about to negotiate with a publisher for The Start-Up of You. In past negotiations, he had experienced that as long as all the priorities were fulfilled, both parties went their ways happy, only to realize the flaws that lay hidden in a minor point somewhere along the way.

Jeff Weiner’s style of negotiating works on the principle of making sure that both sides benefit from the deal. When Gamson went to Weiner to discuss a deal that had to be made in the earlier days of Weiner’s ascension to CEO, the first and foremost thing Weiner mentioned was, “Put yourself in their shoes and see what works best for them.”

The very idea that a Silicon Valley CEO would stand for the greater goal and make sure both sides are not just well represented but also have their objectives met, is what separates him from the herd. There is a lot to learn from this discussion for anyone who has to negotiate at one point or the other. After all, no matter how professional you are, it is usually the emotions that drag a negotiation. The ego, greed and fear of it all threaten to take over, and that is when genuine faith is welcomed.

Their finest moments as expert negotiators came to fore in 2016.

LinkedIn’s sale to Microsoft

LinkedIn’s shares were down 40% back in 2016. It was no longer able to compete with public tech giants like Facebook, Microsoft and Google. As chairman of the Board, Reid Hoffman was sure that private companies would find it easier to compete. The Board unanimously decided to look for options.

As these are confidential negotiations, some of the names have not been disclosed to public. I have edited this article accordingly for better understanding.

The entire process started with CEO Jeff Weiner meeting Microsoft’s CEO Satya Nadella. According to the filing, a concept of combining both businesses was raised.

Aside from Microsoft, four other parties were interested in LinkedIn. Google, Facebook and Salesforce were named by executives of the respective companies in the media, while the fifth party chose to remain anonymous. For the sake of understanding this negotiation process, we will call them ‘the anonymous company’.

Jeff Weiner took another meeting with Salesforce where he had a discussion similar to the one with Nadella, regarding combining both businesses. Weiner had already started negotiations with Microsoft but continued to meet with other prospective buyers to get what was in the company’s best interest. In the course of time Google too expressed an interest to acquire LinkedIn.

Weiner made a call to Nadella saying, “Linked wasn’t really up for sale but others had expressed interest in acquiring it.” This was his subtle negotiating tactic to make sure that Nadella realised that LinkedIn had leverage in any negotiation for its acquisition. Basically saying, “Make sure your offer is really good because we have other people who are interested too.”

In the meantime, Weiner met with the CEO of Salesforce Marc Benioff to discuss a similar proposition. Reid Hoffman and the Board decided to set up a committee to debate the prospect of an acquisition. Weiner hired Qatalyst Partners, who specialized in handling such deals to serve LinkedIn. As a negotiator it is always important to be backed up by people who are the best in their business. And that is exactly what he did. Qatalyst then turned Weiner to another potential buyer, ‘the anonymous company’, although that venture did not really pan out. Weiner personally met with executives at Google, to understand what they were looking to achieve out of the deal.

Reid Hoffman continued to negotiate within the Board and even floated an acquisitional plan to Mark Zuckerberg, CEO and co-founder of Facebook. Zuckerberg eventually turned him down but Hoffman didn’t give up.

Eventually, after performing their due diligence, Google bowed out while Microsoft and Salesforce came up with their offers. They were offering $160 to $165 per share of LinkedIn’s common stock. According to an interview, by this point Hoffman was already in favour of Microsoft acquiring LinkedIn, but that depended on agreeing over a fixed share price. LinkedIn wanted $200 while Microsoft was offering only $160. Hoffman came to the front of the negotiation himself. He personally met with Bill Gates, Microsoft’s co-founder to over the fine points of the deal and discuss the potential profits.

Weiner negotiated with both the companies to get a better price for their shares. Salesforce came up with a better offer and so did Microsoft. The offers were similarly placed around $170 to $175 per share. As Salesforce’s offer was tied to its stock price, the Board decided to sign an exclusivity deal with Microsoft from this point onwards. Hoffman did not want the added risk that such a deal might bring with it. Salesforce was let out of the discussions and LinkedIn proceeded to negotiations with Microsoft alone.

Weiner and Nadella began to negotiate personally. Most of the changes were agreed upon, except for the cost per share. Microsoft was willing to come up to $182 after a number of conversations that Weiner and Nadella had about “Cost Synergies”. But that was not acceptable so Weiner stood steadfast at a price around $200. The Board decided that $196 would be acceptable, at which point Weiner then negotiated for $196.

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The next day, Nadella informed Weiner that Microsoft had agreed to all the changes in the agreement. The share price had been fixed at $196.

#4 Heidi Roizen

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The ability to take a step back, introspect and re-evaluate your objectives is another skill that sets you apart as an expert negotiator. Case in point, one of the most prestigious venture capitalists in the world, Heidi Roizen.

Heidi Roizen could be considered to be one of the many Stanford educated business magnates that transcend the barriers between technology and business. What sets her apart from the rest is her sheer sense of self in bringing the negotiations and deals to a successful end by reorganizing accordingly.

There is an incident from Roizen’s life that details the kind of flexibility it takes to successfully bring a negotiation to fruition. At the start of her career, Roizen found herself head to head with Steve Jobs. On their very first meeting, she found herself at the receiving end of Jobs’ outrage at being offered only 15% of total profits. Jobs refused to do business with her for anything less than 50 percent and tore up the contracts then and there. As Mark McCormack once said, anger can be an effective negotiating tool, but only as a calculated act, never as a reaction. Maybe Steve Jobs read that. Flustered, she walked out thinking she had just blown the biggest opportunity in her life. But as luck would have it, she had a friend in one of the senior executives that worked with Jobs at the time. He hinted her with how Jobs had promised his developers he would get 50 percent. It was a matter of principle. And so armed with that knowledge, Roizen then completely revamped her proposal, included additional costs and represented Jobs with the updated version, where he finally got the 50 percent he wanted, but at the same initial value. She ended up securing the contract and has since then gone on to be a part of even bigger negotiations and even bigger projects.

Roizen’s ability to shrug off criticism and rise to achieve what she wanted, is one of the key factors to being a good negotiator. Often times, you will face the ardent task of going up to a person who wants things their way. If you need that contract then you must have the flexibility to adapt yourself to suit them. In the process, making sure that you bring your negotiation to a mutually beneficial end.

#5 Robert Allen Iger

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Bob Iger, as he is better known, is a man who likes to operate behind the scenes. As the CEO of ‘The Walt Disney Company’, he has been the one who successfully saw to the acquisition of Pixar, Lucasfilm and Marvel Entertainment into the Disney fold.

Iger is known to be a fearless person, capable of great foresight. He pitched the idea to purchase Pixar to the Board at Walt Disney, on his very second day as CEO. That kind of risk taking initiative, coupled with the sheer audacity to think ahead, of the bigger picture and not get bogged down by the problems that exist in the immediate moment, stand out in good negotiators. He eventually convinced not just his Board, but even Steve Jobs, who at that time, owned Pixar to make leeway for the deal.

Bob Iger has grown in stature, to one of a man who can lead any one out of a sinkhole. He single-handedly turned around Disney’s fortunes after Mark Eisner’s unglorified exit. His free thinking and adaptability combine to give him a calculated risk assessment of all the projects he associates with.

Acquiring Marvel Entertainment has proved to be a masterstroke, with over $12.6 billion generated in revenue under the Marvel Cinematic Universe alone. Iger had a very clear reason to go after Marvel. Disney had primarily attracted female audiences with its host of princess characters. His target was to acquire male audience for all future Disney endeavors.

With all that hullabaloo over Iger’s risky, almost impulsive decisions, he has also shown himself capable of taking the back seat, holding hands throughout the deal and making sure the other party gets what they really want, without alluding to any over the top gestures and instilling genuine faith instead. That is exactly what he did, with George Lucas. He personally undertook all negotiations over a one and a half year period, making sure that George Lucas’ wishes were being complied with.

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These abilities are what make him a leader amongst men. If you want to be a business leader, what are the skills you want to develop with respect to negotiating contracts?

These people were/are at the top of their trade. One of the key factors in their success was their ability to negotiate themselves out of tricky spots and into a place which stands to benefit them.

However, business negotiations and contracts are almost a new and alien concept to most of Indian businessmen. Why just business people, even lawyers in India have poor drafting and negotiation skills. In reality, from business owners to managers, a wide range of people deal with outsiders and insiders and end up negotiating deals. It is not possible to have a lawyer at toe all the time to negotiate on your behalf. Getting good at negotiations is something you should consciously work on.

Learning about contract drafting and negotiations do not really require a legal background or previous legal knowledge. Anyone can learn it, get very good at it, and use it to take their career to newer heights. Let be the message you take away from this article. If you want to systematically enhance your contract negotiation skills, please check out this contract negotiation course.

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