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LEGAL ISSUES

Opening the Kimono

How much should you reveal when negotiating with potential partners? Here's how to "open the kimono" now -- without feeling taken advantage of later.
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Phil Sipowicz never felt he was being indiscreet. The CEO and founder of technology consulting firm Everynetwork, based in Waltham, Mass., was discussing a potential partnership with a competitor -- and like any smart negotiator, was trying to play it close to the vest, revealing only what seemed necessary to move the talks forward. "I felt like he was giving me as much information as I was giving him," the 33-year-old entrepreneur recalls. "It was tit for tat." And things were definitely moving forward, with the two parties mulling everything from an informal mutual-referral arrangement to an outright merger. Soon after the initial meeting, an optimistic Sipowicz had his attorney draw up a simple nondisclosure agreement for the parties to sign before things went any further. He faxed it over, waited...and waited some more. Finally, after several weeks of silence, the rival called to say he was no longer interested -- in an alliance, a merger, or anything else. End of discussion.

About a month later, one of Sipowicz's customers called and said he had been contacted by another IT consulting firm -- the very same outfit that had blown Sipowicz off. Sipowicz realized with a jolt that in the course of talking with his rival, he'd casually mentioned three of his key clients. Indeed, he soon learned that the other two had been contacted as well. "It wasn't a broad marketing campaign," Sipowicz says. "They were only going after the clients I told him about." And there wasn't a thing he could do about it. "I'm the one who opened my mouth," he laments.

Sipowicz was angry, confused, and slightly ashamed, and it's little wonder why. In spite of himself, he had revealed too much -- or, in the parlance of veteran negotiators, had "opened the kimono" a little too far. It's a dilemma anyone who has entered into discussions with rivals has experienced. Reveal too little, and the likelihood of reaching a deal plummets; expose too much, and you open yourself to the kind of grief Sipowicz experienced. It's no idle concern: Fifty-six percent of fast-growing companies have entered into partnerships over the past three years, with such arrangements -- marketing cooperatives, joint selling arrangements, and the like -- yielding 23% of overall revenue, according to a survey by PricewaterhouseCoopers. The challenge for entrepreneurs is how to create an environment in which they can open the kimono now -- that is, engage in honest negotiations with a potential strategic partner -- without feeling taken advantage of later.

"I reveal as little as I possibly can. It's not like they can just forget what you told them."

Sipowicz, for his part, prefers to play it safe these days. Though he did not end up losing any of his customers as a result of his ill-fated partnership talks, he nonetheless refuses to negotiate anything with anyone without first getting a signature on a nondisclosure agreement. "Even then, I reveal as little as I possibly can," he says. "It's not like they can just forget what you told them." In addition to stating that any nonpublic information must remain confidential, Sipowicz's standard NDA stipulates that if the deal falls through, both parties are restricted from approaching one another's clients or prospects for two years. "If I see someone react negatively to the agreement, then it tells me that they might not be very serious," he says. Not that it's slowed him down much. Sipowicz recently entered into a partnership with a data storage outfit to offer an added service to his clients and is on the lookout for even more alliances.

When drafting an NDA, try to be as broad and inclusive as possible, suggests David Sylvester, a senior partner at a Hale and Dorr branch office in Reston, Va., and an expert in intellectual property law. Most standard agreements cover customer lists, financial information, and patents and trademarks that are already protected anyway. If possible, try to include trade secrets, prospective customers, and even future product ideas. But expect some resistance. The other company probably won't want to be barred from exploring any random idea that you might happen to bring up at a meeting. After all, it might be something they already thought of and were working on.

On the other hand, "an NDA is only as good as the integrity of the company signing it," cautions Richard Lang, CEO of Burst.com, in Santa Rosa, Calif. In 2000, Burst became an official partner of Microsoft Corp. The company signed an NDA and shared details of its patented video-delivery technology with the software giant. What happened next remains a matter of dispute. Burst alleges that Microsoft hijacked its technology, then pressured Burst customers to stop all support for the technology. Lang is now suing the software giant. (A Microsoft spokesman says the company developed the technology in question on its own.)

Nonetheless, Lang retains a number of smaller strategic alliances and is not adverse to opening up to potential partners. He's just careful to do his homework first, calling customers and suppliers and grilling them: Does the management team have a reputation of fairness? Or have they left a path of unhappy people in their wake? When you do finally meet face-to-face, it's not a bad idea to have someone else with you -- a staff member you trust, say, taking notes if appropriate. "Have a lot of witnesses around the table and get everything in writing," Lang says. "If you are alone, it's your word against theirs."

Finally, remember that however lucrative a potential alliance seems to be, it's always okay to button up your kimono and go home. "Sometimes you need to say no," says Sylvester. "No matter how big the other company is, no matter how good it sounds, sometimes it's better to walk away.




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