The Negotiation

• Part 1 - Markup the Term Sheet
  • BigTechCo, Inc
  • NewCo Tech Company, Inc
• Key Concept: BATNA
  • Resources
• Part 1 - Classroom Instructions
• AI Term Sheet Analysis
• Part 2 - Face Off
• Part 2 - Classroom Instructions
  • A Note on Timing
• Part 3 - Review

Part 1 - Markup the Term Sheet

BigTechCo, Inc

BigTech would like to invest the Core IP licenses in exchange for an equity stake in NewCo. BigTech has forwarded the NewCo Exclusive License Term Sheet (attached to this narrative) for review and comment. Some key features of the Term Sheet include:

• BigTech will retain ownership of the Core IP and license it to NewCo.
• NewCo will reimburse BigTech for the costs of acquiring the two patents and the copyright; BigTech will defend against any potential patent or copyright infringement issues,
• a milestone fee, and
• non-dilution of a 15% equity position in any round of financing up to $2M aggregate financing.

NewCo Tech Company, Inc

NewCo, of course, would like the best deal possible for their fledgling company. They are concerned, however, about giving up 15% equity and the non-dilution. NewCo has provided you, their attorney, with some notes from their last team meeting:

• If they bring in someone with prior entrepreneurial experience to help run NewCo it might result in a higher overall valuation, thus helping to reduce the overall ratio of BigTech’s $165K.
• If NewCo aggressively moves away from the core NETWORKFUNCTION technology, the value of the Core IP is reduced
  • As a corollary NewCo might be more incentivized to stay with the technology (and justify the 15% equity) if they owned the Core IP outright with a Right of Reversion to BigTech if NewCo folds.
• If BigTech is going to own the IP, why should NewCo pay for getting the patents? Shouldn’t the risk of the patent not issuing be on BigTech?
• NewCo will need money to move them forward; BigTech’s non-dilutable 15% position is likely to be unattractive to the handful of smaller investors they will need to scramble some money together once their own money runs out.

Key Concept: BATNA

A key part of negotiating is understanding your leverage and the leverage of the other party. One very important factor in leverage is understanding what each party’s alternatives are. There are always alternatives, even if they aren’t very good.

Every negotiation has two potential results: it works, or it doesn’t. Of course, the final negotiated result may look very different from where the parties started, but sometimes there is no common ground to be found. In this case, both parties go home without a deal and need to then turn to their Best Alternative to a Negotiated Agreement (“BATNA”).

Resources

The Corporate Finance Institute has a great explainer on BATNA (and Reservation Point).

Harvard University also has a great Management Report on BATNA (pdf).

Part 1 - Classroom Instructions

For the first part of this exercise, the class should divide into groups of no more than 4. Each group will assume the role of either Baker and Carter themselves (the entrepreneurs) or, if law students, the legal team for Baker and Carter (the L&E Clinic).

Each group should take 40 minutes to discuss the Term Sheet and, in your role for NewCo propose a redline or make notes as to the changes you would like to see to the Term Sheet.

You should reference the term sheet found in Module 2 and you may find the capitalization table in Module 1 helpful.

AI Term Sheet Analysis

Upload your redlined term sheet (.docx or .pdf) to receive an AI-powered analysis and negotiation suggestions.

Part 2 - Face Off

Once you have marked up the Term Sheet, it is sent to BigTech and their lawyers. Their lawyers have responded and would like to set up a time to talk through your suggestions.

CONFIDENTIAL: FOR BIG TECH EYES ONLY!!

Part 2 - Classroom Instructions

For the second part of this exercise, half of the teams will become BigTech and represent Big Tech’s interests (either as BigTech’s Executives or Lawyers). The BigTech teams should read the “CONFIDENTIAL: For BigTech Eyes Only!!” note above.

Each BigTech team should pair up with a NewCo team. The NewCo team should present its own redline/changes to the BigTech team. The two sides should decide among them the best method of negotiation given the time available (see suggestions below).

A Note on Timing

< 45 mins - Each team should just speak directly to each other and note areas of agreement and disagreement. This is not much time, so do not expect detailed results across all potential disputes.

1 hr - 2 hr - This is enough time that teams typically present and discuss alternatives face to face, but may take time away from “the table” to discuss strategy in between rounds of negotiating. This is enough time that most teams will get through all major issues in the redline, but may not reach definite numbers or fully understand the consequences of their agreements.

3 - 7 days - In this scenario, the parties negotiate outside of class on their own time. This is enough time to fully negotiate the term sheet. Results should be detailed and often the parties may exchange a few redlines before occasionally coming together (either in-person or remotely) to discuss major points.

Part 3 - Review

Each team (or group of teams) should report out to the whole class on how their negotiations went.

Consider:

• The Negotiation Itself: What were the important points in the negotiation? What were the minor points that people got hung up on? Was the other side civil? Do you feel like one team “won” and the other team “lost”? If so, why? What did the losing team concede and why did they feel compelled to concede it?

• BATNA: What was your BATNA? What was your Reservation Point? What did you feel the other side’s BATNA and/or Reservation Point was?

• What changes would you make next time? What were the factors that led to the result? Did you feel you were able to communicate your goals and objectives clearly? Do you feel the result matches your goals and objectives for the negotiation?