Archive for April 9, 2010

Honesty in Negotiations

Written by Sean Murphy. Posted in skmurphy

Daniel Isenberg asked “Should Entrepreneurs Lie?

An experienced VC fund manager I have known for years told me recently that if a person does not know how to seriously twist the truth from time to time, he (she) cannot be an entrepreneur

One of the key tasks we help early stage teams with preparing for and executing successful negotiations.  There is a belief among some engineers that the best marketing and sales people are the most accomplished liars. In my experience nothing could be further from the truth. Most negotiations have long term consequences and involve interacting with people that you will encounter again and who know others you will encounter in the future.  I always assume that at some point in the future the folks I am negotiating will know the full truth of the situation and that very few secrets remain that way for long.

In George Higgins novel “Dreamland” a character remarks “I never forget and I always find out. ” I assume that about anyone that I am negotiating with.

Edward G. Wertheim, Associate Professor of Management and Organizational Development, wrote a great article “Negotiations and Resolving Conflicts: An Overview” (which alas no longer appears to be available on the web) where he addressed the question “Is it ethical to ‘lie or bluff’ in negotiations?”

In poker and in general negotiations one is not expected to reveal strength or intentions prematurely. But discretion in making claims and statements should not be confused with misrepresentation. In general, in our culture, our “rules” forbid and should penalize outright lying, false claims, bribing an opponent, stealing secrets, or threatening an opponent. While there may be a fine line between legitimate and illegitimate withholding of facts, there is a line and again we are distinguishing between the careful planning of when and how to reveal facts vs. outright lying.

Bluffing, while it may be ethical, does entail risk. The bluffer who is called loses credibility and it can get out of hand. Also remember, that most negotiations are carried out with people with whom you will have a continuing relationship. Again, while our culture supports and encourages those who are careful about how and when to disclose facts, out culture does not condone outright lying.

An old British Diplomat Service manual stated the following and it still might be useful

Nothing may be said which is not true, but it is as unnecessary as it is sometimes undesirable to say everything relevant which is true; and the facts given may be arranged  in any convenient order. The perfect reply to an embarrassing question is one that is brief, appears to answer the question completely (if challenged it can be proved to be accurate in every word), gives no opening for awkward follow-up questions, and discloses really nothing.

Skilled negotiators develop techniques to do this. A favorite one is to answer a question with a question to deflect the first question.

George Grellas posted a masterful answer on Hacker News that I am reprinting here with his permission:

Hyping, shading and puffing are normal in entrepreneurial circles and, properly limited, are probably expected to some degree. People discount the statements accordingly.

Misrepresenting material facts or omitting to disclose something major (like the loss of your major customer the day before a funding) constitutes securities fraud and can get you in a heap of trouble, notwithstanding how it may have worked out in a particular case such as that cited in this piece.

There are also limits to hyping if it amounts to misrepresenting material facts. I was once approached by an entrepreneur whom I turned down as a client and who later got busted for securities fraud for having done a demo claiming that certain of his company’s whiz-bang technology was in fact doing something stupendous when it was in reality just a rigged demonstration designed to simulate what he claimed his technology could already achieve. Having raised $7 million based on such demonstrations, mostly from gullible investors, he went to jail for his “over-hyping” of his product.

When it comes to issues such as lying, there are moral issues and there are legal ones. If you are an entrepreneur who wants to avoid serious problems, the rule should always be: never lie in a way that amounts to fraud or misrepresentation (legally speaking), no matter what the supposed benefit. It is not worth it.

Concerning moral issues, the issue for me is one of integrity. Just as we all can stretch something when it helps us, and just as we all do so to some degree, so we can stretch it to the point where it amounts to a pure fabrication. Mild stretching might be considered a gray area. Fabrication is a character issue that can reflect badly on the entrepreneur. Of course, this depends on context as well. If it is clear you are speculating (such as about growth rates), that is one thing. If you are knowingly misrepresenting facts, the natural thought that occurs to people you are dealing with is, “If he will do that once, how can I trust him not to do it again.” You might think it is innocent in your mind, but crooks make a living off such misrepresentations. And there is no percentage in aligning yourself with that which is unseemly. I have repeatedly seen the consequences of such activity in courts of law, and they are not pretty in cases when things do blow up.

I don’t know if either my efforts or Professor Wertheim’s or George Grellas’ words will convince you of the value of candor. At some level if you have to explain to someone why lying is a bad idea more than half the battle has already been lost, probably somewhere around kindergarten, but it’s nonetheless worth the effort.

“Honor is like an island, rugged and without a beach; once we have left it, we can never return.”
Nicolas Boileau-Despreaux

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