STEVE JACKOWSKI

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Negotiating Agreement

1/26/2015

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I recently worked with two companies to finalize the purchase of one by another.  Compared to most agreements I've helped develop, this one was probably one of the most painless.  I'll talk about that particular negotiation at the end of this blog. 

First, let me say that I've been a long time fan of Getting to Yes and Getting Past No, two books that came out of the Harvard Negotiation Project.  They espouse a philosophy called Principled Negotiation which attempts to get both sides to negotiate interests instead of positions.  If you haven't read them, I'd suggest picking them up.  They're short, quite approachable, and if you're not already using their techniques in your negotiations, you should be.

I started my career as a somewhat weak negotiator.  Like many, I was very idealistic and believed that ultimately everyone negotiated for a win-win.  I always wanted to be fair and to give the benefit of the doubt to the other side.  And too often, I gave away too much to get the deal done.  This created resentment on my part and I found myself finding ways to terminate these agreements by looking for better partners.  You see, not only had I made a mistake in my weak negotiations, the other side made mistakes by ultimately taking advantage of my weaknesses. 

How did they lose out?  In business, the vast majority of negotiations are intended to create lasting relationships.  If a negotiation concludes and one side is unhappy, there's a good chance problems will arise from the bitterness and resentment caused by the negotiations.

For me, I think I hit a wall when I began my first negotiations with Israelis.  I don't really mean to stereotype, but I think most people will agree that Israelis are tough negotiators.  My first deals were with startup companies who wanted to license our technologies.  Later, I negotiated with larger companies to represent our products.  One of my companies was acquired by an Israeli company and ultimately, I bought that company back.  I learned a lot negotiating with them. 

At first, it just seemed like they constantly pushed to get more.  If anyone was happy, negotiations had to continue.  I left meeting after meeting frustrated.  Every deal was a lose-lose.  If both parties weren't unhappy, clearly one had taken advantage, so both sides had to negotiate until they were equally unhappy.  Only then did you have a good deal.  Several times, I walked out of meetings convinced negotiations were over.  This seemed to make my adversaries happy, or appropriately unhappy, and usually we came to agreement shortly thereafter.  It seemed like a miserable way to start off a new business partnership.

Worse, they seemed to enjoy these negotiations while I just tried to survive them. 

Or maybe I just didn't understand what was going on.  I didn't know how to stand back from the negotiation and look at it objectively.  I didn't know how to separate negotiating positions from real interests.  I didn't know how to step into the other side's shoes and really look at the situation.  And I didn't know how to deal with people who used position, power, and advantage to beat down the other party. 

In reality, it wasn't the Israelis, it was me. 

Fortunately, after one particularly difficult negotiation, my adversary and new partner decided to counsel me.  Completely independently of Getting to Yes, he taught me the techniques and even role-played situations to help me develop my skills.  And I got much better.

Over the years, I also came to realize that most of us think that each deal is critically important.  Too often we'll do whatever it takes to make it happen.   At some point, we begin to focus too much on making the deal, not on why we're negotiating in the first place.   I learned that very few deals are critically important and that it's okay to walk away when you realize that either the other side isn't listening or isn't sensitive to your interests, or that you just don't have enough common interests to benefit both sides.   Having the ability to walk away is a very powerful weapon in your arsenal.  Ultimately, it makes you step back and look at the negotiation objectively, look at the interests of both sides, look at the people involved and what's important to them, and be a better negotiator.

So what about the recent acquisition?

We got lucky.  From the outset, both sides explained exactly what they wanted to get out of the deal.  With agreement on the highest level objectives, it came down to deal points which were all interest-based.  Personalities did not get in the way.  There were disagreements, but with each one, we looked at alternative solutions, the pros and cons of each, and how they affected the goals of each party.  Sometimes there was impasse.  We'd sleep on it and usually, if there was no reasonable compromise found, we'd agree to a tit-for-tat - an exchange to make up for what one party was sacrificing. 

I must admit though that towards the end, contract fatigue set in.   I've seen this happen a lot.  After weeks of negotiations, particularly if there are delays, frequently caused by the advising attorneys, people just want to get it over with.  This is a dangerous time as too often one side will just walk away exhausted. 

It's a time when both parties need to be conscious of the risks to the deal and may need to bring their attorneys into line by assessing real risks in the contract language.  Ultimately, a contract comes down to trust between the parties.  Remember, attorneys are your advisors.  They're not negotiating the deal for you.  You need to manage them and make them understand your needs in closing a deal.

In our case, both attorneys recognized the importance of the timing of the deal and they too focused on the parties' interests.   This time we survived contract fatigue.

All-in-all, it took about six weeks to finalize and sign the purchase agreement.  Both sides are excited about moving forward.  Both sides feel they got everything they needed out of the deal and both sides came away with a better understanding of the goals of the other. 

I see promising outcomes for both.

Selling/Purchasing a #startup - Assets or Shares?
#Startup - Can YOU Swing for the Fences
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Our #EV (Electric Vehicle) Pros and Cons

1/13/2015

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PictureTelsa Model S in the snow?
We could have bought a Telsa but decided not to.  Was it a good decision? 

A little over a year ago, Karen's faithful Subaru was on its last legs.  She didn't want to give it up but the reality of the increasingly expensive repairs made us decide to buy a new car.   With my recent 'retirement', I drove up the coast in search of surf most days, while Karen had to get to work and to client sites.  Until Karen retires, we need two cars. 

I had recently bought my long sought-after Audi AllRoad.   Since the Audi provided everything we needed for long distance driving (we make regular trips to the Sierra to ski when there's snow or whitewater, and periodic trips to Oregon to visit Karen's daughter), we decided to consider electric vehicles for the second car.  I did the research.

Clearly, the gold standard was the Tesla model S.  It promised a range of 265 miles, an option for fast charging, a  network of free charging stations, and it was a nice looking car for a sedan.  Our friends who owned them loved them.  But at $90,000 in the configuration we would have chosen, it was worth considering other options.

In fact, it made us much more realistic in assessing our driving needs.  Did we really need a range of 265 miles?   My daily rides up the coast were much shorter (though sometimes my surf driving took as long as driving 265 miles), and Karen's commute downtown and trips to clients in the Monterey Bay Area or occasionally over the hill, were nowhere near 265 miles. 

And as we thought about our longer trips, considering the possibility of replacing the Audi, most were to the mountains where there were few charging stations, and at least for 5 months of the year, we often encountered snow.  We weren't prepared to give up the all-wheel drive of the Audi.  Tesla has since announced the all-wheel drive model D, but there are issues with taking that to the snow as well (more on that later). 

And the final nails in the Tesla coffin were that it seemed to be a 'status' car and that I would likely be parking it on the side of Highway 1 when I went surfing.  It just didn't fit the surfing image  and did I really want to leave a $90,000 car parked in some of these places?

So if we ruled out the Telsa, what were our other choices?   We quickly determined that the vast majority, at least 90% of our driving, required trips of less than 60 miles.  And, it turned out that virtually every electric car had a range beyond that distance.  So, I started looking.  A couple of my friends had Nissan Leafs.   They were satisfied with them but not excited.  And at that time, the Leaf's range was surpassed by other, less expensive vehicles.  

I worried about a number of vehicles like the Honda Fit and the Toyota Rav4 EV because it seemed like the manufacturers were just providing these vehicles to meet California zero emission requirements.  I talked with two Rav 4 owners and learned that they were quite happy with the range (over 100 miles), but that they were unhappy with the charging time and the amount of energy required to drive short distances.  The Rav4 was a standard Rav4 with a Tesla battery.  There were rumors of issues between Toyota and Tesla too. 

The Fit was only available on a lease basis which after watching Who Killed  the Electric Car (and personally seeing the experience of one of its owners when GM demanded it back - and he refused), that seemed risky too. 

PictureFord Focus Electric
So ultimately, after looking at several different vehicles, we ended up buying a Ford Focus Electric.  I must admit that this is the first American car I've ever owned and after 14 months of ownership, I couldn't be happier.   Of course, we had a lot to learn. 

The Focus came loaded with every option my Audi has and more - heated leather seats, GPS, multimedia, web access, back up camera, proximity sensors, everything.  Its EPA range was 78 miles - certainly more than we normally drive.  And with Federal and State rebates, I believe it was $22,000 out the door - we could have bought 4 of these for one Tesla.  We decided to lease the car because our driving distances fit within the lease parameters and because we expected that battery technologies would change in the next three years, making the older models effectively obsolete.

Because of circumstances I won't go into, we ended up buying the car in Walnut Creek.  I asked the dealer about the range, telling them that with the Audi, I get much better mileage than the EPA numbers.  Would this translate into a greater range for the Focus?  They assured me that it would (they were wrong).  The GPS told us it was 79 miles to our house in Santa Cruz, so the Focus should make it, right? 

Well, not really.  We stopped in San Jose for dinner after finding a charging station (and figuring out how to use it without a Chargepoint card - another story) to give the car a bump.

Karen fell asleep on the ride over Highway 17, so she didn't get to share my first experience with RANGE ANXIETY.  In Los Gatos, the Focus indicated that it had 60 miles.  By time we got to the Summit a mere 7 miles further, it indicated 13 miles.  It was more than that home and I started freaking out.  Of course on the downhill the miles available started climbing and we had 50 miles by time we got to Scotts Valley.  So ultimately it all worked out. 

Our next surprise was on a very cold day.  We had a fully charged car indicating 80 miles available.  We turned on the heat and our available miles dropped to 35.  It just hadn't occurred to us that with no internal combustion engine, the car produced no useable heat - it needed to use battery power to heat the car.  So we heated the car briefly and turned off the heater.  We now use it sparingly. 

I have since spoken to my Telsa-owning friends and the Tesla has the same problem.  If you use the heater in a Tesla, your range will suffer greatly - hence my doubts about taking an all-wheel drive Telsa model D skiing unless there were charging stations in the mountains. 

We installed a 220 volt charging station at the house but interestingly, we rarely have to use it.  For the last year, Santa Cruz has been offering free EV charging and has several charging stations around town.    There's usually at least one available, though I have to admit that it can be frustrating when there's a plugin hybrid Prius plugged in (they only go 11 miles on battery and don't NEED to be charged to operate), or when an EV sits at the charging station fully charged for hours on end (Santa Cruz doesn't enforce the official 4-hour parking in these spots).  But it's been rare that we haven't been able to get access to a free station.  Santa Cruz says the free stations will be going away soon, but for now, I jokingly claim that I'm a sponsored surfer - Santa Cruz pays my transportation fees to my surf spots on the North Coast.

The last surprise the Focus gave us was after a 6-week trip to France.  We returned and the car wouldn't start.  In fact, we couldn't open the door with the remote.  We had to pull out the manual emergency key.  I was surprised that the battery was dead, so I called the dealer. 

I learned that the Focus has two batteries.  The main battery for running the car was still fully charged.  Unfortunately the very small 12 volt battery had died.  The dealer suggested I jump the car (which worked fine), and that for long idle periods, I disconnect the small battery to avoid battery drain from sensors, clock, etc., or that we have someone drive the car a few miles every couple weeks to recharge the small battery. 

I'm a big fan of electric cars and the Focus in particular.  There's virtually no maintenance - no oil to change, no tune ups.  Having 100% of the torque available at all times means consistent acceleration at any speed.  It feels like a gutsy little car. 

Still, if we could only afford one car, it wouldn't be electric.  Range is a factor. 

I don't like the idea of the current crop of plugin hybrids - it seems like a waste and a complete stop-gap measure to claim zero emissions.  On the other hand cars like the BMW I3 with range extender are very interesting.  Like the Chevy Volt, it is an electric car - single speed transmission, full torque, low maintenance, but unlike a regular plugin hybrid, the small internal combustion engine is used to charge the battery, not to drive the car.  This seems like a great idea until we have a larger network of charging stations, faster charging, and greater battery capacities. 

And while I love Audis and think the e-tron technology is fascinating (it has dual engines like a hybrid, but can run both simultaneously yielding torque, acceleration and amazing horsepower), ultimately, I think it's a cop-out, like other plugin hybrids. 

Our lease expires in 2017.  We'll be looking at replacing the Focus then.  We're hoping that with the rapid advanced in battery technology, it might well be possible to have an EV as our only vehicle. 

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Selling/Purchasing a #startup - Assets or Shares?

1/6/2015

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As a disclaimer, let me state up front that I'm not an attorney and I'm not an accountant.  If you find yourself in a similar situation to the one I'm about to describe, be sure to consult both.  But assuming you agree with me, don't be afraid to argue your points with both.  They may have standard ways of doing things and may just need a nudge to do something better.

Over the course of my career, I have been involved in quite a few acquisitions - three, of my own companies, and several more for friends, business partners, and entrepreneurs I've mentored. 

I'm currently helping the owner of a service business sell her company.  You may recall that in most situations, profitable service businesses sell for one-times sales.  We started with a number a slightly higher than that because the company is growing and next year's revenues look promising.  Ultimately, though, negotiations were  a bit different than other acquisitions I've been involved with.  The big question was how do you guarantee future revenue?  After all, this is a service business.  Perhaps the clients won't want to work with new owners.  Perhaps the employees will object to the sale and will leave, jeopardizing the client income.  Clearly, there is risk for the new owner.

Standard practice in this situation is to adjust the price  downward for the risk and possibly  add performance incentives/additional compensation if certain revenue goals are met.  We did something else.  We decided to set the price at one-times 2015 sales.  In the interim, we set an estimated price and reduced the payments on the note for the first year to ensure solid company cash flow.  At the end of 2015, we'll adjust the note and associated payments to reflect the final price.  The new owner has zero risk in case of lost revenue, and assuming the business continues as it has, the former owner is guaranteed a nice upside.  Sounds like a win-win.

Once the terms were agreed and we had a transition plan in place, the acquirer sent everything off to his attorney who has done quite a few deals in the Silicon Valley.  What came back was a bit of a surprise.  It was an Asset Purchase Agreement.

As an asset purchase, the new owner would be buying all of the seller's contracts, all licenses held by the seller, the company names (including domain names), URLs, trademarks, patents, intellectual property rights, etc., all processes, trade secrets, know-how, documents, advertising materials, insurance policies and interests in insurance claims, rights in all confidentiality agreements, rent, prepaid expenses, goodwill, all physical property including computer equipment, copiers, printers, keys, pencils, erasers, - you get the idea, we need to specify every asset owned by the company, both tangible and intangible. 

Interestingly, it excluded cash on hand and all accounts receivable. 

It also required termination of all employees (though not stated, theoretically, the new owner would rehire the employees). 

So, was this structure in going to further the aims of the new and former owners?  Both want to keep employees.  Both want to maximize revenues.  Both wanted to have the company continue to operate as it was to ensure a smooth transition.  Well, with an asset purchase structure:


  • The current company would cease to exist.  All clients would have to sign new contracts with the new company or explicitly assign their existing ones. There would be significant risk of losing clients who might not want to sign with an unknown company.  They trusted the one who serviced them for years.
  • The employees would have to be rehired and work for a new company they didn't know.
  • With all the cash and receivables going back to the original owner, the company would need an immediate infusion of cash to continue operating. 
I proposed a Share Purchase.  The new owner would simply purchase the shares of the original owner.  As sole shareholder, he would elect a new Board which would appoint him CEO of his now wholly-owned subsidiary.  The employees continue working for the same company, the clients continue to be serviced by the same company and team, the business continues to operate as usual during the transition, and ultimately, the company that employees and clients knew and loved, would have more resources than it did before.

The attorney balked.  The big issue was liability.  In an asset purchase, you don't take on the liabilities of the company, only its assets.  This reduces risk for the buyer.   With a share purchase, you buy the whole company including its liabilities.

We sat down with the acquirer and discussed the implications of the Asset Purchase and how it would adversely impact 2015 revenues and would require upfront cash to fund operations.  We also suggested that to protect him from 'unforeseen' liabilities, the original owner would indemnify him. 

Although his attorney pushed back, he argued that the risk to the success of the business with an Asset Purchase outweighed the potential liabilities of a Share Purchase, particularly with the protection provided by indemnification.  The attorney ultimately agreed and drafted a much simpler contract.

Don't get me wrong.  Asset Purchases can be useful and are often necessary.  If you have a company that is failing, it's best to protect yourself from liabilities with an Asset Purchase.  If you're cherry-picking technologies or products or people, an Asset Purchase may make sense.  If you don't want to transition clients, customers, and/or employees, an Asset Purchase works. 

But if you want a very smooth transition of clients, customers, products, etc., consider a Share Purchase.  Acquisitions are by their nature disruptive.  You should do anything you can to avoid making them more complicated than they need to be.   If it makes sense to operate the subsidiary you've just acquired in the long term, great.  Keep things as they are.  If not, fold it in slowly.  Transition.

In my experience, Transition is the key to success of any acquisition.  In many cases, Share Purchase makes this much easier.

Selling/Purchasing a #startup - Assets or Shares?
Negotiating Agreements
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    Steve Jackowski

    Writer, extreme sports enthusiast, serial entrepreneur, technologist.

     
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