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 past 17 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 $35m and $50m.” That means $50m to you, right?
Or ponder
“We’d like to invest between $5m and $7m at a valuation of between $10m and $15m.” That means a post money valuation of $22m to you, right?
Or what do you think when someone says “about $10m” instead of “between $9m and $11m”?
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 that 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 $3m to $5m, 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 $3m, 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.
Can't say I always agree. What if the offering is based on several factors that aren't yet apparent i.e. prototype development, next quarter's revenue, patent status? I think it's perfectly acceptable and honest to talk about a range contingent on other factors. It's just like saying that "that '62 Chevy is worth somewhere between x and y dollars, but it depends on the condition.
Comment by Fernando — September 23, 2009 @ 2:47 pm
Ranges also indicate the fear associated in getting the other guy’s number wrong and losing a deal. If there really is a continuum of deal terms that are doable, then pitching specific options works. If you offered me $7M on $10M or $5M on $15, I need to make a choice between cash and dilution.
Comment by Peter Hoskins — September 23, 2009 @ 7:50 am
I agree. Most people who offer a range are signaling a weakness, either in the amount of information/time they have, their ability to make a decision or just plain fear of getting a no answer.
Comment by @timraleigh — September 23, 2009 @ 3:18 pm
So true. And this is true whether in financing or in any sort of contract negotiation. I think the point about revealing your weakness in "knowing" your deal is also crucial. The fact that such a crucial term is in the range usually means you are on soft footing. Classic response from most negotiators is to use your lower number and negotiate you DOWN from there. (to the comment re: a car–that works if you are discussing a hypothetical car. but if you were selling a specific car–I would certainly expect you to know the specific price!)
Btw, only disagreement is I would advise them to start at 4 if their range was 3-5. Always advise leaving wiggle room. Asking for less is ALWAYS easier than more.
Comment by @ideasurge — September 23, 2009 @ 3:32 pm
This is true in salary negotiation. If someone says the job pays between X and Y, an "A player" would not take the job unless he got Y. And a smart company would not want the guy who would settle for the low end of the range.
Being clear and specific is better. That being said, that does not mean you should negotiate. If I say the job pays X… I want the "A Player" to ask for Y. The answer will lay in the middle.
Comment by thom singer — September 23, 2009 @ 4:02 pm
so if you have a range in mind that you would be offering… how do you take that and narrow it down to a single number that would be the most advantageous to you? or do you just go with what you really want, rather than a range you think you might get?
Comment by Bradley Joyce — September 23, 2009 @ 4:48 pm
Beg to differ with this statement:
"Most people who offer a range are signaling a weakness, either in the amount of information/time they have, their ability to make a decision or just plain fear of getting a no answer."
The first step in beginning a negotiation is to gauge your opponent's position and experience. The response one can get from throwing a range is usually more telling than a flat number – if you know how to read it accurately. If the person is an A player you will learn that quickly and if not you can adjust your strategy and tactics accordingly.
Comment by Darius — September 23, 2009 @ 5:27 pm
Again this is spot on.
I would also propose a corollary which is that any additional blathering that you do trying to justify your price after putting it out there weakens your position tremendously because the other party realizes you're not confident in your position.
You figure out what you want, how bad you want it, what you can live with, and put out a price. If it doesn't work so be it you have to be either ready to walk or listen to a counteroffer.
I would also say that the person that is on the selling side (getting money transferred to their account) has to be the one that puts out the price first. I can't stand when the seller tries to get the buyer to put out a price. To use the car analogy: "How much would you like to pay for that car?? One dollar. What?! You asked me a question….how much would I like to pay for that car….one dollar. Now what are you willing to sell it to me for?"
I think trying to "judge" the other parties reaction or sophistication by putting out a range doesn't even work when negotiating with my 7 year old daughter. If I told her we could pick one or two bags of apples this weekend at the orchard she'd start at two and work for three.
Comment by PhilSugar — September 23, 2009 @ 5:43 pm
Brad, this is very helpful. If you had some time, it would be great to see other real world examples of how you would recommend opening negotiations and responding .
Comment by Ted Rheingold — September 23, 2009 @ 5:49 pm
People should read "Getting to yes". It should not be about negotiation as much as respect towards a meaningful outcome. The numbers are semantics in the equation. Brad is right in that a number shows respect towards the situation and that there will always be room for negotiation when it is based on a mutual understanding of the scenario.
Comment by John May — September 23, 2009 @ 5:59 pm
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Pingback by Ditch The Range Scale When Negotiating | Lifehacker Australia — September 23, 2009 @ 12:32 pm
The key point is that if your range for selling is $35 – $50 million it means that you want $50 million but would take anything more than $35million. Thats your bottom line. Once you reveal it and i am a buyer i will start at $35 million and will completely ignore the $50 million. Saying $35 -$50 million is the same as saying $35 million. If my range was $35 – $50 mil, Id start at $55 and see the reaction i get and then lower it as necessary. Use the first few reactions to feel out the market. Once you put out $55 mil, ask directly what they think and at what price they would buy. By throwing out your highest # you can now get a feel for their lowest number as the first number they will throw out is their lowest offer. and the negotiation is what results in something between the sellers highest asking price and the buyers lowest price.
Comment by satish — September 23, 2009 @ 7:36 pm
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When using a range in salary negotiations I always use the number I’m actually after (for example if I want 80K) as the bottom of my range; so I would offer a range of 80K-90K. Everything over my base figure is there because I included it for negotiating purposes but now we’re in “bonus money” territory for me. The fact that a negotiation is taking place and I have offered a range gives me the advantage regardless of where the number falls because my base number is what I really was after in the first place. However, the other side understands that just low balling the range will require further negotiating with no where to go but up making the result even more favorable for me. Remember – both sides of a negotiation want what the other has or they wouldn’t even be negotiating in the first place.
Comment by Rezendes — September 23, 2009 @ 1:07 pm
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Pingback by Ditch the Range Scale When Negotiating [Salary] · TechBlogger — September 23, 2009 @ 1:31 pm
Rezendes – Amen! I'm glad at least one person here is clued in to this…
Comment by Rahul — September 23, 2009 @ 8:55 pm
Agreed although I must say some of those tactics assume two good faith parties and mutual understanding. Not always something I assume when I represent my clients. I give the other side the benefit of the doubt, listen and watch their actions, and then let that decide the approach. In my large scale outsourcing deals, once a range was given–a concession was made. And once it is out, it never goes back in the box. Pandora has been released.
Otherwise, tho, I very much agree: Getting to yes is an excellent book for anyone that negotiates regularly (and we all do at times)
Comment by @ideasurge — September 23, 2009 @ 10:14 pm
Again, negotiating dynamics are key. In our deals with the big insurance companies, high balling our range at the early proposal stage might have meant not even getting an invite to the table….
Comment by @ideasurge — September 23, 2009 @ 10:19 pm
Well – I guess we disagree! I've been in thousands of negotiations and I've never found a range to be a good way to gauge my "opponent's position and experience". In fact, I find that the reaction that the other side has to a specific number is much more telling as I then don't have to guess how they are interpreting the range (which almost always – unless they are really naive – will be in a way that is advantageous to them).
Comment by Brad Feld — September 23, 2009 @ 11:59 pm
Fernando,
The article is about eliminating ranges from your *negotiating* vocabulary. Estimates and projections are outside the scope of the article.
Comment by Bobby — September 23, 2009 @ 9:57 pm
Re: who makes the first offer – it actually depends. If I'm CEO of a company that is doing great and I get approached by a company that wants to buy my company, I have no incentive to name a price because I don't need to sell. So – in this case the buyer needs to go first.
Comment by Brad Feld — September 24, 2009 @ 5:01 am
I think this is spot on for _most_ negotiations, but I'm not sure it's as applicable when an entrepreneur asks for money.
In that case, there is not a zero-sum game, but a partnership proposal where it's likely that the company may need more money down the line. If the VC is really excited, they can invest at the top of the range (presumably at a higher valuation). This allows the entrepreneur more room to execute without needing to focus on raising money. If you're offering a lower valuation, they can take less money, hit a few milestones and then raise more.
Of course, you could try the other approach: put out your thinking on a company valuation after the first hour. Say: "This is totally non-committal, but I'm thinking a $9MM pre-money sounds about right" Then ask how much they're raising. I bet you'll get a much more precise answer!
Comment by Tim Ogilvie — September 24, 2009 @ 12:13 pm
As someone on the receiving end of a huge number of entrepreneurs asking for financing, I ALWAYS prefer a precise number with a rationale behind why that is the right number. I'm also completely comfortable that this number isn't set in stone, but I like to hear why the entrepreneur wants to raise $X. When I hear that they want to raise something from $A to $B, my immediate reaction is that they haven't thought through what they need to get to the next stage of the business.
Comment by Brad Feld — September 24, 2009 @ 12:38 pm
My point is you should know your "opponents" position and experience. This signals that you value and respect the person/company you are presenting to. If you don't then don't waste your time. The term "throwing a range" is a signal that your basically asking "is this a suitable price to you (the buyer)" which is Ok if any price is what you will settle for. It still gives the buyer no real idea what you think you're worth and why/how you arrived at that price. Your estimation of your (deal) value may be right/wrong but that is where the discussion/negotiation starts. I think my point is do your research, understand what/who you are talking to and what's important to them before you engage in a discussion on price.
Comment by @timraleigh — September 24, 2009 @ 2:08 pm
Re: "the starting position you are trying to establish", and the anchoring effect: http://hbswk.hbs.edu/archive/4302.html
Comment by dugsong — September 24, 2009 @ 2:16 pm
Yes you are absolutely right on that one. I'm sitting there assuming
we're talking about an entrepreneur asking for funding….but you are
completely right…if you ask to buy my boat, antique car, or
company….and I didn't put it up for sale. You owe me first offer.
Good post as usual.
Comment by PhilSugar — September 24, 2009 @ 2:19 pm
Great post Brad. There are simply no realistic place for ranges in a negotiation. That's not to say that numbers on the table need to be precise, either. In a negotiation, it's perfectly reasonable to ask for more or offer less. It's a negotiation after all.
In my experience, ranges are an American thing. Americans, fir the most part, are polite and non-confrontational. Other cultures around the world have few qualms about putting the extremes of demands right on the table and, often, in your face. It's uncomfortable for many American business people, but it's a much more efficient way for getting things done.
Comment by Will Herman — September 24, 2009 @ 11:30 pm
I would give this post between a 7 and a 9.
Most people use ranges to indicate flexibility, when in fact they are indicating indecisiveness. Its like shaking your head no, and saying yes. It confuses and tends to lead to extended discussions rather than shorten them.
I prefer to say "I want/need X. If you dont feel that is fair, I am open to having discussion so that we are both happy with the outcome." Sets a proper expectation and entry point for the discussion.
Comment by micah — September 25, 2009 @ 12:26 am
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Pingback by Their Eyes Were Watching Todd | — September 24, 2009 @ 5:50 pm
Just because you have a range in mind doesn't mean you have to share ALL of your thoughts in a negotiation. Pick a number, and negotiate from that – if you pick a range,m you're giving the client two starting points to negotiate from, instead of an optimal one, and they are sure to pick the starting point that is most in their favor. Save both of you some issues, and start with one number.
Comment by PeterZ — September 25, 2009 @ 5:30 pm
Sometimes mate I think we think the same things.
Comment by @stevenjreading — September 25, 2009 @ 5:49 pm
I would however give you reply a firm 8.
Comment by @stevenjreading — September 25, 2009 @ 5:50 pm
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