When Is It Legal to Lie in Negotiations? (1991) | Hacker News Reader

When Is It Legal to Lie in Negotiations? (1991)

sloanreview.mit.edu

71 pointslarrys46 comments

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.

"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.

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.

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.

> It is strictly and empirically speaking not a red flag if a prospective employer refuses to disclose the cap table, since blah blah blah..

Not for you, maybe. For the rest of us... http://www.eligiblemagazine.com/wp-content/uploads/2013/01/r...

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.

This makes much more sense to me. I think you may still run into well-run companies where preferences and other terms don't get disclosed to candidates (they should be), but it seems much fairer to call that a red flag.

Would you mind explaining preferences and ratchets?

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.

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."

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).

Not a red flag not to share cap table.

But you should see the grant as a percentage of fully-diluted outstanding stock, and you should know the preference on top of the cap table, and you should know the last granted strike price and if there is anything that would prevent your grant from being granted at that price.

I know some of these words.

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.

Could he have sued the studio if he could prove it was his idea?

It's been done before and is the reason why studios do not read unsolicited scripts. Art Buchwald sued Paramount when Eddie Murphy was given sole story credit for a movie he unsuccessfully pitched. Art won the lawsuit, but instead of appealing, paramount settled for $900k and in exchange the ruling was vacated.

The movie was "Coming to America" (1988)

https://en.wikipedia.org/wiki/Buchwald_v._Paramount

How about a trailer?

https://www.techdirt.com/articles/20140331/11334226752/anima...

If the studio had pre-emptively given copies of all its scripts in production to some third party authority, it could avoid the negotiations issue. I'd imagine it doesn't come up enough to warrant this, though.

If I recall correctly, this was over Eddie Murphy's "Coming To America." Art Buchwald wrote and pitched a script that was passed on, yet later produced almost identically.

J. Michael Straczynski claims the same thing happened to him when he pitched Babylon 5 to Paramount, who passed. Then not too long after that Star Trek: Deep Space 9 debuted, and there were some noticeable similarities between the shows.

As a big fan of B5 and a minor fan of DS9, I always found the "whole series was a copy" claim ridiculous. The similarities between the shows were often tangential. A lot of the things that were actually similar, like the fact that both series focused on large space battles, were most likely because of technology (ie, the ability to render large space battles) rather than the DS9 writers stealing from the B5 script. The shows as a whole follow wildly different trajectories.

The only version of the theory I've heard that made any sense is that studio execs who knew of both shows (which were being developed simultaneously, not particularly inspired by each other) may have taken ideas they liked from B5 and suggested them in a very conceptual way to the DS9 writers ("how about having a ship in addition to the station, so we can have some occasional planetary adventures?")

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).

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.

"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.

I don't see how lying about anything could be considered ethical. It may be socially acceptable to lie about yourself, but that doesn't make it ethical. Plenty of things that are socially acceptable are in fact profoundly unethical.

So, the line is in fact very simple: if you are an ethical person, you never lie.

Update: however, upon reflection, society forces us into practical considerations. If you avoid lying you will be taken advantage of because you weaken your position in society. For that reason, while lying is never ethical, it is sometimes the only realistic alternative. You may for example have people lying about being hiv-positive to get a job. There is no rational reason in many job categories to reject such an applicant, but in practice they won't get a job if they tell the truth. I also would make an exception for withholding the whole truth. Sometimes people have the right not to know things which would only hurt their feelings and bring no practical benefit.

Whats the idea?

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.

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.

"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.

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.

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.

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

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

I just found I destroyed the post with an edit: it should read "trying to codify good conduct".

down to writing it themselves, even if they are not expert in that part of the law

Wow, that sounds just like engineers.

Is it legal to lie to get around paywalls?

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

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

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.

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...

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

Follow-up article: "When is it Legal to Just Google Around a Paywall?"

Might be because I blocked their cookie but this is what I get clicking your link: "This is a summary of the full article. To enjoy the full article sign in, create an account, or buy this article."

Paywalled again even on the google link.

try opening in private/incognito.

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

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

Just google " "when is it legal to lie in negotiations""

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