Negotiation is a constant state of existence for a startup founder. You negotiate equity splits with co-founders. You negotiate term sheets with investors. You negotiate salaries with early employees and contracts with vendors.
Many founders approach these conversations based on gut feeling or desperation. This is dangerous.
A more scientific approach relies on knowing your BATNA. This acronym stands for Best Alternative to a Negotiated Agreement. It was developed by researchers at Harvard to bring rationality to high-stakes discussions.
Simply put, it is your backup plan. It is exactly what you will do if the current negotiation fails and you walk away from the table.
It is the single most important source of power in any negotiation.
The Function of BATNA
#The purpose of identifying your BATNA is to provide a metric for decision making. It prevents you from accepting terms that are too unfavorable and from rejecting terms that it would be in your interest to accept.
In a startup environment, uncertainty is high. A solid alternative provides a floor for your risk.
If you are negotiating with a potential investor, your BATNA might be:
- Bootstrapping the company with savings
- Taking a loan
- Accepting an offer from a different investor
- Pausing growth to focus on profitability
If you do not have a BATNA, you have no leverage. You are negotiating from a position of necessity. The other party can dictate the terms because they know you have nowhere else to go.
BATNA vs. Reservation Price
#It is easy to confuse your alternative with your bottom line. In negotiation theory, these are distinct concepts.
Your Reservation Price (or bottom line) is the least favorable point at which you will accept a deal. It is a specific number or term.
Your BATNA is a course of action.
Your alternative informs your reservation price. If you have a strong alternative, you can set a higher reservation price. If your alternative is weak or non-existent, your reservation price lowers because you cannot afford to walk away.
Consider a hiring scenario. You are trying to hire a CTO. She wants 10% equity.
If your BATNA is hiring a different, equally qualified candidate who wants 5%, your reservation price for the current candidate changes. You can firmly say no to 10% because your alternative is strong.
If your BATNA is building the product yourself, which you do not know how to do, your alternative is weak. You might have to accept the 10% demand.
Strategic Application
#Founders should determine their BATNA before every significant meeting. You should follow a simple process.
List all possible alternatives if the deal falls through. Evaluate the value of each option. Select the one that provides the highest value. That is your BATNA.
There is an unknown variable here that you must consider. We often overestimate the strength of our alternatives.
We assume we can easily find another investor. We assume we can easily find a cheaper manufacturer. This optimism bias can lead to walking away from good deals.
Ask yourself if your backup plan is real or hypothetical. Is that other investor actually ready to wire funds, or did they just give a verbal nod?
A true BATNA is actionable. It gives you the confidence to sit at the table, look at the terms, and make a decision based on logic rather than fear.