Negotiation Rhythms #1: Zone of Possible Agreement

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsel founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Each party will enter a negotiation with the knowledge of their limits and the desire to make as favorable a deal as possible.

We begin our illustration of the basic negotiation rhythms with the fundamental negotiation question from Harvard Negotiation Project’s classic Getting to Yes[1]: Is there a Zone of Possible Agreement (“ZOPA”) between the limits set by each party?

 

An agreement is possible if the seller's limit is lower than the buyer's limit. Here's an example:

 

If an engineer is willing to work for a salary of $100K and a company recruiting that engineer is willing to pay $120K, there would be a ZOPA between $100K and $120K.

However, there would be no ZOPA if the amounts were reversed and the company would not offer more than $100K and the engineer would not accept less than $120K.

Capturing the ZOPA

Presuming that there is a ZOPA, the seller will want to sell for as much over the seller’s minimum as possible, and the buyer will want to buy for as much below the buyer’s maximum as possible.

 

It would be best for the seller to settle on a price at buyer’s maximum and for buyer to settle on a price at seller’s minimum.

Each is free to try to capture as much of the amount within the ZOPA as possible, especially if they do not know one another’s limits.

Hiding the ZOPA

The danger comes when one or more parties push so hard to settle on an agreement well above their minimum or below their maximum that they fail to discover that there is a ZOPA between the parties.

For example, the engineer would be at an advantage in the first example above if she convinced the company that she would not accept a salary below $120K. By pushing for $120K, she might end up with the maximum possible salary available from the company. However, she would end up with no deal at all – and have missed the chance to make a desirable agreement at somewhere between $100K and $120K – if she convinced the company she would take no less than $125K.

The opposite is also true. If the company convinced the engineer that they could offer no more than $95K, they would have convinced the engineer that there was no ZOPA and killed the deal.

ZOPA Conclusion

 

Each party has two conflicting goals in a negotiation:

 

1.     Transparency: To discover a possible point of agreement, if one exists. This requires each party to be transparent enough about their limits that the parties can identify whether there is a ZOPA. If the parties kill the deal, they will have sacrificed the value of a beneficial agreement.

2.     Ambiguity: To settle on a price that is as close to the other party’s limit as possible. This requires each party to be ambiguous in communicating their limits to encourage the opposing party to believe the ZOPA and their potential gain are smaller than they actually are. If a party settles at their limit, they will have sacrificed the benefit they could have captured by pushing to settle closer to the other party's limit.

 

Our next post, #2: Best Alternatives to Negotiated Agreement, illustrates how negotiators set their limits. Post #3: Sales & Threats shows the flexibility of the pattern by illustrating how negotiators use sales techniques to change the other party’s limit.

[1] Roger Fisher, William Ury and Bruce Patton, Getting to Yes: Negotiating Agreement Without Giving In.

 

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsel founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.