
When Is It Legal to Lie in Negotiations? (1991) - larrys
http://sloanreview.mit.edu/article/when-is-it-legal-to-lie-in-negotiations/
======
dzink
Negotiations or market research?

When Staples started, the founder proved the concept of an office-oriented
superstore meticulously with a single store in the northeast. He picked a
neighborhood, mapped every business around it, knew exactly how many
accountants and offices were around his area through a survey, you get the
idea. With the evidence, he talked to a number of investors. One investor gave
him a pretty high valuation. In a meeting with another investor soon after,
the investor asked a number of questions, hmm-ed the answers and escorted the
founder out the door. In investor then promptly returned to his desk, opened
up his rolodex and called the best retail exec on the list to start what is
now Office Depot - in a different part of the country, to avoid a direct
clash, because chains such as these expand geographically.

While this is an extreme case, it is not uncommon. Many investors who like a
business idea from one startup, look up and talk to every competitor in order
to pick their best bet for the race to that market. If the research surfaces a
better competitor, the firm doesn't invest or choses the competitor. If it
didn't it is useful as "market research" to help the startup. Either way, the
entrepreneurs share plenty of information to appear attractive, and probably
feel good about the VC attention they are getting. The "ideas are worth
nothing" mantra is out there for a reason - execution is everything at the end
of the entrepreneurial race.

The really sleazy negotiations happen when the competing firm starts applying
"cloning" tactics to misinform or undercut its opponent. For example, having
multiple uninterested parties call the seller with really low prices to create
the impression the item for sale is worth little. Then the actual buyer comes
in with a low offer that looks lush in comparison. Prepare for the worst and
do your due diligence thoroughly if you are worried about this kind of stuff.

------
YokoZar
"And companies selling their securities are required to disclose important
adverse facts about their business to prospective buyers."

Does this include prospective employee stock options? It would be great to
know that startups seeking to hire me have a legal obligation to tell me about
financial troubles.

~~~
Zigurd
It's a red flag if the person making you an offer stumbles if you ask to see
the cap table, or can't express the ISO part of the offer as a percentage.

~~~
tptacek
It is strictly and empirically speaking _not_ a red flag if a prospective
employer refuses to disclose the cap table, since most companies _will not_ do
that. You can't reasonably call standard operating procedure among all
professionally managed startups "a red flag".

On the other hand, I agree that it is a red flag to refuse to disclose the
percentage an allocation represents.

~~~
Zigurd
I was imprecise. I meant that you need to know financing rounds, prices,
classes, and financially relevant terms such as preferences and ratchets. You
probably want to know who led each round, and a business should not have a
problem disclosing that. The fact that uncle Lenny has 10,000 shares in the
seed round is not neccessary.

~~~
Consultant32452
Would you mind explaining preferences and ratchets?

~~~
tptacek
Preferences define how investors take money out of the company when it
liquidates. Investors might get 1-3x their money back if the company sells, or
worse, get 1-3x _and_ their percentage share of the proceeds after that money
is taken off the table. If a company succeeds but isn't a breakaway success,
preference terms can have a big impact on how much common shareholders earn
off the sale.

I'm assuming by "ratchets" he meant anti-dilution provisions, which often mean
that if the company raises a new round on anything less than amazing terms,
existing investors get topped up with new shares to maintain their ownership
percentage, at the expense of common shareholders.

~~~
Zigurd
As long as we're being precise here I have to correct some minor issues:

A preference, strictly speaking can be with or without a ratchet. A preference
means that, at a liquidity event, you get paid before another class of shares.
A ratchet means that you get paid a specified minimum price before other
shareholders get paid.

An anti-dilution provision usually is invoked in a "down round" and it does
what it says: It compensates earlier investors for dilution in cases where the
value of their shares don't go up. The details are often complex, and the
circumstances where this happens are often where a company is in trouble, and
holders of common and options on common are going to get massacred anyway. At
which point, if the company wants to keep you, you'll get a new set of
options. Which is a long way of saying "you got bigger problems."

~~~
rdl
IMO none of this really matters when you're picking whether or not to join a
company. As an outsider, if a down round happens while negotiating, you should
move on.

In virtually any case where a company has a down round, or fails to meet
preferences in a sale, you want to leave anyway. Your stock being worthless is
the least of your problems. The exception is if you're specifically part of a
turnaround, in which case you'll have a newly negotiated package (unless you
were a VERY early hire sitting on a bunch of still in the money options or
something).

------
ignostic
Wow, I learned something valuable here: that it would be illegal to use
negotiation solely to harvest ideas.

I remember the story of a script writer who pitched his script, but then the
studios rejected him. One studio just had their own similar script written. He
never sold the script, and when the movie actually came out no one was
interested because it was too similar to the (essentially stolen) version that
had been produced. Could he have sued the studio if he could prove it was his
idea? How similar would it have to be? Would he have to prove that they
entered into negotiations just to get his idea?

\---

I wonder because I've had an idea brewing in my mind for the last 5+ years,
but I have nowhere near the millions in capital required to get it going. The
price tag is so high that I don't expect any ownership, but I just want to be
involved and to make a fair amount if it succeeds.

A law class once taught me that "ideas cannot be patented," so I completely
shleved the hope. I couldn't patent the implementation because it would be
easy to implement the same idea a hundred different ways. I bring nothing more
than an idea to the table, and then I'd be easy to cut out.

I'll talk to a lawyer before I do anything, but it sounds like I could take my
idea into negotiations with a larger company. As long as I can prove that the
idea was mine, they can't just take it and copy it. Maybe?

I'm feeling a glimmer of hope that my idea could someday get off the ground,
but I worry that the modification loopholes that have held me back in the past
are too large.

~~~
michaelochurch
What I'm curious about is where the legal line lands on social proof
arbitrage.

For example, lying about competing offers-- for jobs or funding-- is generally
considered ethical, insofar as social status inflation and self-promotion fall
into the "everyone does it, and most people have to" bucket. (Is it legal? No
idea. But few consider it unethical.) If you know an employer does a lot of
back-channel reference checks, you absolutely _should_ use a fake competing
offer (if you don't have a real one) to put time pressure on them.

On the other hand, the article cites cases in which lying about a competing
offer is illegal (and also, for those cases, unethical).

The weird, queasy line is that it seems to be illegal (and generally
considered unethical) to lie about a product, whereas lying about yourself
(i.e. "you are the product") is ethical, legal, garden-variety social status
inflation-- except surrounding official, factual credentials where higher
standards must be imposed (e.g., as in law and medicine).

~~~
nostrademons
Lying about yourself is generally considered unethical as well. It usually
doesn't get you prosecuted (unless you lie to the government for a security
clearance or something), but it can and probably will get you fired if your
employer finds out, and there have been some high-profile firings in that
regard.

I think your confusion comes from the difference between "lying about facts"
vs. "telling a story". Facts are things that are independently verifiable -
things like your dates & places of employment, degrees conferred, job titles,
salary, etc. There are varying degrees of consequences for lying about these -
typically, lying about your salary gets at most a little distrust, while lying
about your degrees can get you fired - and you can always simply refuse to
answer or provide those facts, but lying about them is almost always
considered unethical.

However, _how_ you tell the facts is your story, and you can and should paint
that in the most positive light. For example, "founder" of a product is
usually a complicated title because of the twists and turns all ideas go
through. It could legitimately be used to refer to the person who came up with
the idea, the person who did the first workable implementation of the idea,
the person who first realized an idea was a viable business, the person who
contributed the bulk of the money toward making the idea a viable business,
the founder of another organization that merged early on into the business in
question, etc. And there are famous people who fit into all of those
categories - Elon Musk, for example, basically never did the work of reducing
an idea to a workable implementation, but he is credited with founding
multiple companies where the heavy engineering lifting is done by others.
Steve Jobs mostly contributed money and cheerleading to Pixar, but is widely
considered a founder of that company.

~~~
sheepmullet
"There are varying degrees of consequences for lying about these - typically,
lying about your salary gets at most a little distrust"

Because it is an incredibly gray area. For example I currently get 6 weeks
annual leave and very generous medical. If I'm applying at a place that only
offers 2 weeks annual leave and limited medical then when they ask my current
salary I'm going to add these benefits based on their equivalent cash value.

For example I earn ~$2k/wk and so the extra annual leave is worth $8k/year.
And to get the equivalent medical would cost me around $10k/year. So I'm going
to happily add $18k to my current salary.

Likewise I don't feel it is unethical to adjust for cost of living differences
between countries and cities. For example if moving to San Francisco for work
I would need to be paid about 20% more just to maintain my current income.

I don't think talking in purchasing power instead of nominal is unethical. Etc
etc etc.

------
larrys
This is important to always consider, as a reason that having someone with a
legal background can sometimes contradict entrepreneurship:

"Note that such lies are not always illegal. Rather, the law is content to
leave the ultimate question of liability to a jury, with all the expense and
risk of a full trial. Of course, victims of such conduct may decide that
litigation is not worth the trouble."

The reason is is that this is not strictly a legal question but also a
strategy questions as well as probabilities. Also the dollar amount comes into
play. A large negotiation by Boeing is the not same as a small startup or even
500 person business with a $100,000 transaction.

~~~
Argorak
Another pattern I found is that CEOs with legal background tend to see contact
negociations as an exercise in writing legally correct text (down to writing
it themselves, even if they are not expert in that part of the law), which
ends up taking far more time than negociating on the important facts and then
having external lawyers formulate that out.

~~~
larrys
"even if they are not expert in that part of the law"

Agree. And what's even more dangerous is someone with legal background but not
years of experience that is able to weigh, on gut, the pros and the cons of
adding that legally correct text. [1] It's like the paradox of system
security. A trade off between being, say 100% secure but then either opening
up other potential security issues or having usability problems caused by
something with a extremely small chance of happening.

[1] Here's an example. You have a tenant. You want to be able to charge them
for a certain thing upon move out. You can add the exact item or you can be
vague. Both come with risks. The risk of adding the text is that you bring it
to their attention and they nix it. The risk of not adding it is that you may
not be able to charge for it upon move out. What do you do? It's not a legal
question (legal wise you would add it) it's a strategy question.

~~~
Argorak
That's an interesting one. I have a another example: trying to put codify in a
contract. For example, I recently had a client asking me for on-call duty on a
weekend. So I quoted that and put it in the offer. (fixed fee for being on
call, + a bonus for every hour worked)

Now, they were asking me whether it shouldn't be included that if I build the
stuff, I would feel obliged to make sure it runs well. Sure, I do, and if the
team I am working with is firefighting, I will be a good colleague. But if
someone wants the right to call me at any time, they shouldn't be surprised
that this has a price.

~~~
ThrustVectoring
What you're selling by codifying it is the choice. You can choose, at the cost
of alienating the team, to take off of any weekend firefighting. This is a
valuable choice if you do something like make plans that are expensive to
cancel.

If you don't have the choice, you can't make plans that are expensive to
cancel, which is a real economic loss.

~~~
Argorak
Sure. But the problem in that case is that the client wanted the goodwill
route and wanted it codified, which doesn't work ;).

~~~
ThrustVectoring
Yeah, you can either negotiate/decide on it on a vague, case-by-case basis -
or you can negotiate beforehand.

------
ForHackernews
Is it legal to lie to get around paywalls?

~~~
davidu
Don't lie then, just search google and click through.

------
cowpig
Can someone alter the link so that it's no longer a paywall?

------
michaelochurch
You can also break the law while telling the truth in negotiations.

For example, if you condition a lawful but harmful action on an unrelated
demand (and "unrelated" is very subjective here) from another party you are,
in many jurisdictions, committing extortion. (If the adverse action and
condition are related, e.g. "I'll sue you if you wrong me", then it's not
extortion. "I'll expose your affair unless you give me $100,000" is extortion
because there's no connection between the affair and demand for payment, and
because the extortionist derives no benefit from exposing the affair.) It's
not illegal to write bad reviews of a restaurant, but if you demand a price
discount and threaten a bad review, you can be found guilty of extortion. So
"I'll write a bad review if you don't give me a discount" might be truthful--
you can lawfully do so, and even have this intent (intent being impossible to
prove)-- but you still can't say it.

This comes up in severance negotiations. If you say, "I'll [legal adverse
action X, such as disparaging the company] unless given $Y", it's very easy to
end up on the wrong side of the law. You probably won't end up in jail, but
you lose all leverage as soon as you make a mistake, which is easy to do. If
you're negotiating for severance, you should always let a lawyer do it. It's
also a lot easier to get "soft" terms (positive reference, right to represent
oneself as employed, possibly without pay) because those are connected to
adverse actions. If you're getting a bad reference, you do have cause to get
out in front of the smear and disparage the company. ("We have to get our
stories straight. It's best for both of us. Here's what I want, and here's
what you get.") But if it's about cash severance, the payment and your
disparagement are unrelated enough that it's best avoided.

------
larrys
Paywall - To get this full article use the google link:

[http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd...](http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB8QFjAA&url=http%3A%2F%2Fsloanreview.mit.edu%2Farticle%2Fwhen-
is-it-legal-to-lie-in-
negotiations%2F&ei=RsCtU4arKu21sATJr4Aw&usg=AFQjCNFZfFW3Y7a7i5MKut6R0vx2CfcLzQ&bvm=bv.69837884,d.cWc&cad=rja)

(Or Google "when is it legal to lie in negotiations")

~~~
zentiggr
Paywalled again even on the google link.

~~~
gatehouse
try opening in private/incognito.

apropos nothing, congrats the the NYT for convincing my parents to do general
browsing with cookies off.

~~~
robterrell
Indeed, my wife now keeps Google Chrome on her iPhone solely to open NYT links
in incognito mode.

