First Negotiation, Not First Refusal.
Give a likely buyer the first conversation. Do not give it the last word.
The Creator's Journey · Chapter VIII, Capital and the Exit
At WiseWire, I did not start by trying to sell the company. I structured a deal for Lycos to use our technology. Lycos had no directory, and it needed us more than anyone. The deal generated real revenue almost immediately.
Inside that deal I gave Lycos something specific: a right of first negotiation. Not a right of first refusal. They sound alike. They do opposite things to your leverage.
- Right of first refusal
- The buyer can wait until you have an offer from someone else and then match it.
- Right of first negotiation
- The buyer gets the first conversation. If it does not produce a deal, you are free to talk to anyone.
The problem with a right of first refusal is what it does to everyone else. It freezes other buyers. Nobody wants to do the work of making an offer that someone else can simply match. A clause that looks like a courtesy to a partner quietly removes your alternatives.
A right of first negotiation only gives the buyer the first conversation. If that conversation does not produce a deal, you are free to talk to anyone.
The reason you negotiate is to produce something better than the results you can obtain without negotiating.
Leverage is your alternative
Roger Fisher and William Ury of the Harvard Negotiation Project gave that alternative a name: your BATNA, the best alternative to a negotiated agreement. It is the standard you judge any offer against. A right of first refusal weakens your BATNA before the negotiation starts, because the other offers stop arriving.
That is what the clause protected at WiseWire. A couple of months after the technology deal, Lycos decided it wanted to buy. The first price was too low. That is when the right of first negotiation earned its keep. We were free to go to GeoCities. Once Lycos understood it was about to lose the deal, it moved quickly. Lycos bought WiseWire.
The difference is one phrase in a contract and all of your leverage at the exit.
Protect the first conversation
- Find the clausesSearch every partner, license and investment agreement for rights of first refusal, first offer and first negotiation.
- Offer the conversation, not the matchIf a partner wants priority, give it the first conversation. Keep the right to talk to others if that conversation does not produce a deal.
- Write down your alternativeBefore any sale conversation, name your best alternative to a deal. If you cannot name one, build one first.
- Let the right people hearWhen it is time, make sure the likely buyer knows it is not alone.
Quick answers
What is the difference between a right of first refusal and a right of first negotiation?
A right of first refusal lets a buyer wait for another offer and then match it. A right of first negotiation only gives the buyer the first conversation. Rob Frasca gave Lycos the second in the WiseWire technology deal, which left him free to talk to GeoCities when the first price was too low.
Why should founders avoid giving a right of first refusal?
Rob Frasca explains that a right of first refusal freezes other buyers, because nobody wants to do the work of making an offer that someone else can simply match. That weakens the founder’s best alternative before any negotiation begins.
Sources
- Rob Frasca, The Creator’s Journey (forthcoming), Chapter VIII, Capital and the Exit.
- Roger Fisher and William Ury, Getting to Yes: Negotiating Agreement Without Giving In (Houghton Mifflin, 1981; Penguin editions with Bruce Patton). Publisher page. Source