Ask Norm
Inc. columnist and CEO Norm Brodsky offers tips on negotiating, overcoming seasonal slumps, giving up stock to investors, keeping employees from stealing customers, coping with the family business, and fending off loneliness.
Norm Brodsky is a veteran entrepreneur.
Tips on negotiating, overcoming seasonal slumps, giving up stock to investors, keeping employees from stealing customers, and coping with loneliness
Among the many E-mail messages I've received lately were several that raised issues we all have to face sooner or later. I decided to share some of them with you this month. I also want to thank everyone who has written in. Rest assured that I read all my E-mail messages. They are the engine behind this column.
Jerked around: For eight months I've been negotiating a licensing agreement with a company that wants to produce a toy I've invented. The process has been painfully slow. I'd send a proposal in; the company would ask for changes; I'd compromise; the company would ask for more changes; I'd compromise again. At one point we hit a particularly difficult issue, and my contact insisted on taking the contract to a lawyer -- who tore it apart. So we started all over again. After several more months of this, I thought we finally had an agreement. Then I received a fax demanding a whole new set of changes.
I couldn't believe it. I'm beginning to think that my negotiating partner isn't serious. At what point do I admit the deal isn't happening and move on to another manufacturer? --John
Dear John: You shouldn't be surprised at what's happened. Good negotiators always try to get the best deals for their company. How? By taking as many bites of the apple as the other party will allow. Your problem is that you let the other side set the ground rules of the negotiating process. You should have insisted up front on separating business issues from legal issues. In other words, you'd negotiate the business issues first, and the lawyer couldn't then reopen them.
As it is, you don't have much leverage. I'd advise you to tell your contact something like, "I'm sorry, but I've gone as far as I can at this time. I still think that your company is the best one for my product and that the deal we worked out would fly, but you're leaving me no alternative other than to look elsewhere. Not that I want to, and maybe I'll find out I'm being unrealistic. If so, I may come back."
If the guy really wants your product, he'll make you a reasonable proposal. In any case, don't ever close the door completely. In negotiating, it's always a mistake to paint yourself into a corner you can't get out of.
Seasonal nightmare: I have a three-year-old company that produces job fairs. We've had some success, but we're riding a roller coaster. Business is great for three or four months in the spring and again for two or three months in the fall. In between, there's nothing. Our cash flow falls to zero. Meanwhile, we still have to pay our employees.
We've tried attracting customers during the down months by offering discounts -- to no avail. The cash crunch gets so bad that we spend the good months just recovering. Any suggestions? --Kent
Dear Kent: First of all, I'd stop offering those discounts. You're lucky no one took you up on them. They could have undermined the profitable part of your business. (See "The Capacity Trap," August 1996.) Second, look for ways to diversify. Are there other types of shows you could produce in the down months? Could you do consulting during those times? Third, deal with the cash-flow problems directly. Can you negotiate to pay your leases during the months when you have more money in the bank? Can you speed up your collections when cash is tight?
You might also try explaining the problem to your employees and asking for their suggestions on ways to diversify and to improve cash flow during the downtimes. You might even set up a game around it -- with noncash prizes, of course. Employees can often come up with ideas you'd never think of.
Equity dilution: I'm in the process of launching a software company, and I've just about run through my own financial resources. I need to go outside for financing, but no one seems to be able to tell me how much equity investors will want for their money and how much I should be willing to give up. My goal is to go public in three to five years, at which point I'd like to own 51% of the stock, with employees holding from 19% to 29%, and investors having the remaining 20% to 30%. Are those numbers realistic? --Jeff
Dear Jeff: As a general rule, the amount of equity you have to give away depends, first, on the level of risk involved and, second, on how well you know the investors. If you go to venture capitalists for financing, it's unlikely you'll retain a controlling interest in your company. In fact, you might not remain in your company at all if you fail to deliver on your projections.
You have a somewhat better shot at retaining control with angel financing. Your best bet, however, is to use Rolodex financing for the next round -- that is, money from friends, relatives, and acquaintances. You may be able to get the funds you need in the form of a loan, or a loan convertible to stock, in which case you'll give up little, if any, equity.
Going public is another story. The underwriter will tell you how much stock you have to sell. I doubt that after the offering you'll still own 51%. Then again, you seldom need a majority of the stock to stay in control of a publicly owned company.
Stolen customers: You've often said that if you run your business right, departing employees shouldn't be able to take your customers with them. So what am I doing wrong? I give our salespeople a lot of freedom. After a year or two they walk off with the account. --Charles
