How to actually get to win-win

Many companies and business development executives talk about the importance of a “win-win” philosophy in their relationships and negotiations.  They want to be successful and their partners to be successful in a true synergy.  But, what is their road map for getting to a win-win?  Too often, there isn’t a real methodology behind the talk.  Win-win is in danger before the race even starts.

Here’s an approach that can be applied to many different types of business arrangements to try to achieve that holy grail of win-win.  It has worked for me over many years of negotiating hundreds of deals.

1.  Spend extra time on the economics up front.  Since win-win is supposed to mean that each company makes more money with the partner than it would without, what modeling has been done to ensure that this becomes reality?  In practice, it is tempting to jump into papering a transaction before serious financial analysis has truly run its course.  Yet, a dedication to getting the numbers right will typically pay dividends.

2.  Respect, rather than take advantage of, your partner’s largest concerns.  This is harder than it sounds.  Every negotiation will involve a certain amount of chess and horse-trading.  But, if your partner reveals a walk away position or two that will be standard in its industry, respecting that position will instantly deepen the relationship.

3.  When it comes to the legalese, be prepared to settle on true neutrality.  The typical contract will favor the side of a deal that prepared it.  There isn’t necessarily anything wrong with that, as long as both sides understand what true neutrality means and, assuming the leverage is roughly equal, are willing to settle on it.  It means reciprocal representations, indemnifications and confidentiality provisions.  When two companies are located in different states, it often means choosing a third state’s law to govern the contract.

4.  Understand the details.  Is the devil really in the details?  Since execution is about details, the answer is almost always yes.  Sure, contracts get amended all the time, but the wrong starting point could kill the relationship before it has time to blossom.  Lawyers should understand the business purpose and the business people should understand the legalese.  Everyone needs to read the contract.

5.  Strive for a long-term contract.  As much as corporate America talks about long-term thinking and strategy, there are many forces that make this challenging.  Quarterly earnings calls for public companies emphasize 90 days of performance.  Revenue recognition rules can essentially encourage short-term deals.  It’s difficult to establish win-win in a short time frame.  Aim for a five-year term.  Expect, plan for and demand success.  Commitment facilitates win-win.

Ownership is (still) everything

With open source software being widely popular and Larry Lessig becoming a household name, is the concept of intellectual property ownership dead?


Absolutely not.


Inventors are still applying for patents as aggressively as ever.  Ownership comes up in almost every commercial sales contract, in every M&A transaction and in every IPO.  Today we even have companies claiming ownership in LinkedIn contacts.


This is all because ownership remains a great differentiator.  Generally, ownership entitles you not just to engage in some kind of lucrative activity.  It also allows you to prevent others from doing it.  Companies sue others for patent infringement or negotiate for ownership of software in commercial contracts because millions, potentially billions, of dollars are at stake.


How should companies react to this reality?


Embrace it.  Recognize this value and work to maximize it.  Invent, develop and patent using the best engineering talent you can find.  Once you have intellectual property, protect, nurture and grow it.  Negotiate hard when the topic of intellectual property comes up, because revenue and enterprise value are up for grabs.  


By acknowledging that ownership of intellectual property remains a foundational issue in company valuations, companies set the philosophical groundwork for business practices that will help them win.   

The death of the simple NDA

Non-disclosure agreements may never have really been simple, but they do seem to have become more complex in recent years.  No doubt part of the reason for this is the increasing sophistication of those writing and managing NDAs.  


Whatever the cause, the result is a substantial amount of risk for companies and individuals who dismiss NDAs as mere "boilerplate."  It is now as crucial as ever that those doing business with others use NDAs and, when using others' forms, read them carefully.


Here are a few challenging positions I have seen in NDAs that I suggest users approach with caution.  


1.  Assignment of intellectual property ownership.  An NDA is designed to simply allow two parties to start talking to one another about a deeper relationship.  Yet, in a couple cases, I have actually seen an NDA provide for one party's ownership of everything created over the course of the relationship.  No proprietary technology company will sign up for this.    


2.  Non-competition provisions.  Occasionally, NDAs will prevent one party from competing with the other.  This is another aggressive position with economic implications far beyond the NDA's typical "Let's talk" premise.  Non-competition provisions may also raise anti-trust issues.


3.  No-hire provisions.  Some NDAs will prohibit the solicitation of the other party's employees or customers.  Others will take the next step of seeking an actual no-hire clause.  Either provision will drive how the parties interact with one another.


4.  Lack of an independent development carve-out.  Most NDAs provide exceptions for what kind of information is deemed confidential.  A crucial exception that is sometimes missing regards independent development.  It's important to be able to retain the right to come up with good ideas independently of those that a vendor, customer, reseller or joint venture partner might have.


5.  Inappropriate period of protection.  NDAs will typically provide for a confidentiality period of about five years.  But, a business providing access to its most sensitive secret sauce that it expects to be valuable for decades would certainly want more protection than that.  It's important to think through how an NDA will be used in a given situation before signing up for a certain period of protection.


6.  Venue provisions.  Parties will often agree in advance where to litigate a dispute arising out of a contract.  But, this choice of location could create leverage for one party over the other.  Be thoughtful about agreeing to venue in your business partner's backyard if it's thousands of miles away from where you work. 


7.  Inconsistencies with other applicable documents.  If some other commercial agreement is signed as a result of the initial discussions, it will be important to consider how it relates to the NDA.  A new agreement with its own confidentiality provisions could create confusing conflicts with the NDA.  The NDA needs to be either completely superseded or carefully integrated into the new agreement.   

Insider PSA: "You're shady and self-dealing"

Venture investor Chamath Palihapitiya recently wrote a critical e-mail to the founder of Airbnb.  Palihapitiya passed on the opportunity to invest in Airbnb's latest financing round.  His criticism focused on a controversial and unusual element of the transaction.  In a nutshell, a dividend to common stockholders was being used to provide cash to founders to the disadvantage of other employees.  The e-mail raised many valid points and some good coaching, including the sentence, "Treat your employees the same as you'd treat yourself."


So what's the problem?


The problem is that the e-mail was somehow leaked to a reporter.  Given the amount of confidential information Palihapitiya was given, this amounted to a credible insider public service announcement that the founder could be considered, as the e-mail put it, "shady and self-dealing."  I don't believe that Palihapitiya intentionally leaked the e-mail, but the disclosure was embarrassing to all involved.


It's also symptomatic of a couple challenges in Silicon Valley's business culture.  


We have become too reliant on e-mail to communicate in detail about sensitive topics.  Coaching and constructive criticism are valuable, but e-mail is often an unhelpful channel for it.  


In addition, Silicon Valley is sometimes too open.  We have open office spaces.  Many investors refuse to sign non-disclosure agreements.  Some companies sign NDAs without reading or thinking about them - a very risky practice given that I have actually seen proposed "NDAs" in the last few years that assigned all intellectual property created in the business relationship to one party.  Every thought is posted on Twitter.  The "confidential" footnote is not inserted in the first place or ignored.


It's a good time to revisit the value of 1:1 verbal communication and confidentiality.  Not everything is meant for public dissemination.


If Palihapitiya's email "really was just an attempt to give (the founder of Airbnb) private feedback," he should have picked up the phone.

Customer Loyalty Chronicles, Vol. I – Roland

Hugely successful companies often boast about their "secret sauce."  They will cite particular ways they manage or recruit their people, their unique methods of quality control or their brilliant Super Bowl advertisements. Successful companies surely have a secret sauce and the greatest companies rise above with long term customer loyalty.  


When customers love the product so much that they are passionate about the company, that is an irreplaceable asset.  Apple sets the bar for its ability to generate long term customer loyalty.  But, there are other companies that have secured long term customer loyalty.


Roland Corporation is a company that I feel doesn't get near the attention it deserves for its success in this realm.   The Japanese manufacturer of electronic musical instruments has been a market leader for over 35 years, supplies major artists as well as amateurs worldwide and has developed the most devoted following in the industry.  In studying Roland, I have observed three elements that have driven its long term customer loyalty.


Innovation.  Roland is obsessively innovative, in ways that might even lead some to at first question it.  Apple is widely revered for being able to create demand with supply.  When the iPod came out, many said, "Why do we need this exactly?"  Today, everyone has one.  Same for Roland's electronic drums. An oddity at first, today they are common because of their flexibility and reliability.


Passion.  An extraordinarily driven and passionate founder seems to make a world of difference when it comes to customer focus.  Roland's was Ikutaro Kakehashi, who was orphaned at age two, spent four years of his early life in a hospital with a protracted illness and started his career as a watch repairman.  The love Mr. Kakehashi has for music and the desire he has to build the best musical instruments in the world is clear in his products and in his moving personal memoir.  If you're interested in an off the beaten path business book, I highly recommend it.  It's as if Mr. Kakehashi is still obsessed with making sure each and every customer who comes by his little store is delighted with his work. 


Freshness.  Roland is able to stay fresh with long time customers and gain new ones by keeping up with emerging trends in music recording and performance.  Among the ways it does this is through promotion of its relationships with young stars, such as Lady Gaga.  Decades after starting his company, Mr. Kakehashi remains a dreamer, writing in his book that Roland is looking at "turning imagination into sounds, images, and even shapes, then combining them to produce new solutions."


Long term customer loyalty is a key element of corporate success. Companies that are able to get there, like Roland Corporation, are great guides to achieving it.

America’s Trickiest Laws, Vol. II – Contractor-Employee Classification

The use of contingent workers has become a key component of many companies' human capital management.  Independent contractors minimize headcount, maximize flexibility and often allow a company to use more specialists than its size would ordinarily permit.


But, the era of contingent staffing has created a tricky challenge.  Federal and state governments have taken a strong interest in the classification of workers as contractors versus employees.  In a nutshell, a contractor classification costs the government revenue.  And the misclassification of employees as contractors has reportedly cost the government billions of dollars.


Unfortunately for business, getting the classification right is no easy task. The 11 factor test of the IRS is helpful but it is neither clear cut nor weighted.  On top of this, the states have different, fluid standards of their own.  The costs of getting it wrong are significant, from fines to the possibility of personal criminal liability for company officers.


The good news is that as attention to classification issues increases, so have the resources for helping to address the challenges.  Experienced commentators have taken a renewed interest in the topic, publishing useful guides to dealing with contractor management.  Third party vendors have emerged that will provide objective contractor testing and employer of record services to insulate companies from many of the risks of using contractors.  One that I have personally used with great satisfaction is MBO Enterprise Solutions, which recently published a case study on its success at Levi Strauss.


Contingent staff have become a critical tool in achieving big goals in corporate America.  Being aware of the challenges that come with contractor classification is important to running a successful workforce solution.   

Googlerola emphasizes importance of strong patent portfolios

Google's $12.5 billion bid for Motorola Mobility, at a 63% premium, is generally thought to be about using Motorola's large patent portfolio to help protect Android and Google's other mobile communications interests.  The deal has renewed debate on the weaknesses of our patent system and generated some interesting discussion about Google's plans.  It also emphasizes the reality that today, meaningful patent portfolios are still critical to business.


One would think that Google would have developed a much larger portfolio of its own.  The company has generally had a long term view, is indeed very innovative and has plenty of talented engineers, product managers and lawyers to write patent applications.  The reality, however, is that creating in-house patent development programs is challenging.  There are many reasons for this but a primary issue is simple - since time spent on patents doesn't necessarily turn into extra revenue until years later, patent work can be hard for young companies to prioritize.


So how does a company start a serious patent program that increases its valuation?  There are a few simple steps most any company can take.


All company stakeholders need to recognize the value of intellectual property and regularly review metrics.  Examples of such metrics include number of applications filed per quarter and competitor comparisons. Patents are probably the most objective measure of technological innovation, and yet often take a back seat at many board meetings to a deep dive on short term financials and sales data.  Management, board members and shareholders of technology companies, having seen the valuation premium paid for Motorola's portfolio, should all expect measurable productivity from their teams in this regard.


In addition, have one point person ultimately responsible for developing a patent strategy.  Whether this person is the company's Chief Technology Officer, VP Marketing, General Counsel or has some other role such as a VP of Intellectual Property, having one owner is much more likely to create accountability, clear goals and success.  Committees can be helpful, but identifying a leader will help tremendously.


Finally, create company-wide incentives for, and recognition of, inventors. Simple incentives such as cash bonuses are a sure way to increase productivity in patent programs.   Give, as an example, $1,500 per named inventor for granted patents and watch the number of patent applications increase rapidly.  I also like awarding plaques and certificates to inventors as recognition for their innovation.


These building blocks can help you establish your own successful patent program.  And developing a deep patent portfolio can help a technology company create significant enterprise value while protecting core assets.       

America’s Trickiest Laws, Vol. I – The Foreign Corrupt Practices Act.

Our nation may be one of laws, but our laws don’t necessarily make compliance easy.  In this series, I will try to highlight “tricky” laws, or those that corporations and professionals often find confusing, inconsistently enforced or impractical given various business conditions.  In my view, these laws deserve extra attention from corporate America because they often create great uncertainty.

The Foreign Corrupt Practices Act (FCPA) is an increasingly prominent example, as the Department of Justice has been both aggressive and successful in prosecuting FCPA cases of late, including another win earlier this month in the ongoing Haiti Teleco scheme.  

On the surface, the FCPA seems pretty basic.  It has an anti-bribery provision that prohibits corruptly paying or offering to pay anything of value to a foreign official to secure an improper advantage or influence him in his official capacity.

Where the FCPA gets tricky is in five different practical areas.

First, local custom is less important than compliance with law.  The rallying cry that, “We must pay bribes in country X because others do” is not a defense.  In reality, it’s an FCPA violation waiting to happen.

Second, and occasionally at odds with the first, the FCPA has exceptions that some commentators believe are not really exceptions at all.  Grease payments made to expedite or secure routine government action are permitted.  Wait, what?  Some bribes are OK if we call them “facilitating payments”?

Third, FCPA involves “successor liability,” meaning that a company is liable for the FCPA violations of the other companies that it has acquired.  Mergers and acquisitions activity is complicated enough.  With the FCPA, compliant, ethical companies have an additional risk to address – what is the FCPA profile of the target company?

Fourth, the FCPA includes a record keeping provision, requiring careful accounting of all transactions.  This includes records relating to facilitating payments.  So, if the company’s judgment about whether those payments were compliant proves incorrect, the documentation of the violation will be in black and white.

Fifth, most companies probably do not have adequate full time staff proactively managing FCPA compliance.   While significant SEC filing requirements (e.g., 10-Ks, proxies) lead corporate legal and finance departments to staff up to regularly prepare these documents, there is no tidy equivalent in the FCPA world.

When doing business internationally, keep an eye on the FCPA.  It’s one of our “tricky” laws.

Facebook didn’t steal your stuff. And don’t click “agree” next time.

Worries over Facebook’s privacy policies continue.  Upon closer examination, the concerns are more broad than Facebook’s specific policies.

The latest episode involves a fairly straightforward practice.  Using the Facebook mobile apps will sync your friends’ contact information between Facebook and your phone.  Only you can see it and you clicked “I agree” in setting up the connection between Facebook and your phone.  But, this alarmed some users when it was “reported.” 

General web usage habits are implicated by this concern.  How many times do we speed through a web-site, clicking “I Agree” multiple times without reading the fine print?  Too often.  Even if Facebook wanted to eat our first born, many would sign right up for it and click “I Agree.  You can have the second one too.”

Some of Mark Zuckerberg’s past cavalier statements about privacy certainly haven’t helped, such as when he reportedly expressed surprise early on that people would so willingly share personal information.  “People just submitted it.  I don’t know why.  They ‘trust me.’  Dumb [expletive].”

But, more than anything, I think folks are reacting to broad concerns over the increasingly public lives we live through our Internet identities.  We subconsciously recognize that we are not reading the license agreements and don’t fully understand the privacy policies.  We hear about people sharing too much in their news feeds.  I don’t believe any of those issues are ultimately Facebook’s fault.

Perhaps it’s time to consider this kind of privacy policy first and foremost…

Thank goodness for volunteerism.

I spent much of last week as a volunteer scorekeeper at the Bank of the West Classic, a professional tennis tournament held every summer at Stanford University.  I was one of about two hundred unpaid tennis lovers who acted as ushers, sold programs, directed fans around the grounds and, as in my case, logged extensive data on each ball struck by the players.  Add to that hundreds of ball kids who were also volunteering.  It was great fun and I had the privilege of meeting several of the players, including Maria Kirilenko (career high singles ranking of 18).

Meeting Maria Kirilenko at Stanford.

Among the many parts of this experience that fascinated me was how many of the volunteers had a deep knowledge of players who are hardly household names.  As I watched Sharon Fichman, I understood why.  Like the volunteers, she toils in anonymity, rewarded mainly by her own love of the game.  She practiced hard, played hard and gave it everything – but failed to qualify for the main draw in singles.

Sharon Fichman brought her spirited game and 289 Twitter followers (Serena Williams has over 2.1 million) to Stanford.

More important than the tennis was the reminder that volunteerism is the backbone of many American systems we sometimes take for granted.  VolunteeringinAmerica.gov estimates that there are over 60 million volunteers per year in America.  Underfunded schools rely on parent volunteers.  Volunteers staff soup kitchens, homeless shelters and YMCA tutoring programs.  Our entire system of democracy counts on volunteers at the voting stations!

The whole experience made me thankful that there are so many opportunities to get involved and so many passionate people who do just that.

Difficulty closing the deal? Get a room.

No, not that kind of room.  This blog is intended to be interesting.  But not that interesting.

In my experience, the best way to get a challenging transaction signed is to gather all of the key decision makers on both sides in a conference room, laptops and blue pens in hand, but away from either party’s offices.  This group’s sole task is to close out all of the hard issues and actually sign the contract.  Both parties need to commit to this course of action in advance, allocating enough time to work through every open item.

There are several reasons that this approach tends to work.

First, “getting a room” forces prioritization.  If your organization is typical, you’re trying to do many things well.  Everything is a high priority.  Inevitably, this results in the more complex transaction not getting the consistent attention it needs to close.  The stops and starts are inefficient and often cause the deal to get bogged down unnecessarily.  Getting everyone together for as long as it takes ensures that the transaction gets the focus it deserves.

Second, using the conference room approach smokes out misalignment quickly, even within a negotiating team.  On each side of the negotiation there will be a divergence of skills.  This leads to divergence of opinion and behavior.  The lawyers will seem ready and willing to fight over minutiae and trade detailed redlines for months.  Meanwhile, one company’s CEO and VP of Sales may not have the same vision for a particular transaction.  It may not be clear who owns what issue, even on the same side of the table.  Sub-teams may have been created that drill into certain issues in a vacuum.  Getting everyone together encourages alignment by requiring each side to react and make decisions promptly in a coordinated manner.  Venture capitalist Mark Suster has written on a similar notion, which he calls “cutting out the middle man.”  

Third, this method encourages compromise, which is probably the single most significant requirement for the agreement to get signed and for the long term business relationship to succeed.   By committing to signature ahead of time, posturing becomes more difficult.  Teams are under pressure to compromise because leaving the conference sessions without signature will be considered a failure.  Usually, being face to face makes the discussion more cordial and friendly.  Developing that spirit of cooperation is much easier as you share meals and spend more time together.

Finally, gathering the key folks together in one place instantly cuts through bureaucratic systems that would otherwise cause tremendous delay.  Every company has systems and public companies will typically have strong internal controls.  Even when those responsible for these systems are communicative and aligned, getting through the line takes time.  Companies willing to close transactions in a conference room also have systems in place to streamline red tape when senior management requires it.  Whether that means sending a representative from the purchasing department or a revenue recognition specialist to the meeting, making clear to everyone that a contract is about to be signed can suddenly end the series of waiting games.

Try or revisit the all hands conference room approach.  In most situations, it will quickly pay meaningful dividends.

"Please just tell me I'm great."

This post was co-authored with human resources guru Lisa Youngdahl, SPHR, HCS.

The Atlantic recently published an interesting piece by psychotherapist Lori Gottlieb.  In it, she contends that the cult of self-esteem is dooming our kids to unhappy adulthoods.   The idea is that as parents we are trying so hard to make our kids feel happy and seem successful, regardless of the reality around them, that we are not preparing them for life’s ups and downs.  The Atlantic’s cover art summarizes the idea perfectly – a trophy adorned with a soccer player completely missing a kick with the tag “good try.”

This trend has been going on in corporate America as well.   Employees are sometimes so sensitive about feedback that we either sugar coat or just hold back key data to avoid hurting feelings.  The worry is that the employee might leave at an inconvenient time (“I must get this next release over the finish line before I talk to Sally”).  The informal office network is powerful and we wouldn't want to harm morale.

Management doesn’t necessarily fare any better.  The dying art of the exit interview is the proof in the pudding.   Companies will often throw out softball questions and lap up the pleasant answers from departing employees who don’t want to burn any bridges.  “I loved it here but just got a surprise opportunity that I didn’t feel I could pass up.”   Yawn.

It’s almost as if we all want to be lied to for the sake of keeping a smile on every face.  “Please just tell me I’m great.” 

How do we solve for this?  Valuable resources include Fournies' Coaching for Improved Work Performance and Patterson's Crucial Confrontations: Tools for Resolving Broken Promises, Violated Expectations and Bad Behavior.

Some refreshing honesty and self-awareness every once in a while probably wouldn’t hurt.  Take some time to be frank with yourself about strengths and weaknesses.  Strengthen your company’s exit interview process so that you’re asking hard, probing questions and reporting the blunt answers anonymously to management.  Tell a subordinate what they could have done better on the last assignment.  It doesn’t have to be cruel, rude or loud, but direct communication is ultimately…well, great therapy.

"Top talent" not reading their own comp agreements

The controversial stock option arrangements at Skype have been receiving a great deal of attention in connection with the company's sale to Microsoft.

Detailed pieces have been written at TechCrunch, Bloomberg, CNN and Reuters.

The central twist of the Skype stock option arrangement is simple.  The company had the right to repurchase VESTED stock options from departing employees at the same price that the employees paid.  This means that departing employees, even if in the money on vested stock options, could walk away with nothing.

These provisions are unusual for most groups of employees.  There were other elements around the acquisition that were controversial, including several involuntary terminations.  The stock option treatment has been called everything from evil to likely fraudulent.  Whether one believes that these kinds of provisions are fair, there is little doubt that most prospective employees would look much less favorably at joining a company where such an arrangement exists.  It could be made up with higher salaries, but there should be a market penalty.

But, what is most interesting to me in the conversation is that most of the commentary acknowledges that the Skype arrangement was disclosed ahead of time.  The problem was that apparently the "top talent" at Skype didn't carefully read the legalese or consult a lawyer.  That's unfortunate.

"Employees had no idea what they were signing," according to TechCrunch.  According to Bloomberg, a product management employee at Skype whose blog entry triggered much of the attention "never bothered to read" a critical document relating to the stock option arrangement.

This is a remarkably clumsy habit that still seems to affect tech veterans in Silicon Valley.  How can these smart, accomplished business people simply ignore the specific elements of their own compensation arrangements?  How can they be counted on to serve their employers' interests in building the next great category winner if they aren't diligent enough to even protect their own interests?  

Sure enough, that product management employee at least is now singing a simple tune.  In his blog he advises, "LAWYER UP — it'll be worth your while to get an attorney to carefully review all employment documents so that you know what you're really getting into."