How to negotiate deals that keep your leverage

1 The bottom line

Keep ownership of the asset, the timing and the alternatives that matter, and trade away everything else. Leverage comes from what you own and can walk away from, and it fades the moment you are the one who needs the deal.

2 Key takeaways

• Own the asset your business depends on. Whoever owns it can take it from you.
  • Sam Walton, Walmart11:35 lost 5 and a half years of work in Newport and was back to zero cash.
  • Walt and Roy Disney38:30 only got Oswald back in 2006.
• Give away what costs you little and keep what compounds. The cheap concession buys the rights that grow.
  • Bill Gates, Microsoft1:50:00 went from $25 million in revenue in 1982 to $98 million over the next 18 months, almost all of it clone-driven licensing.
  • Disney's1:03:50 merchandise sales reached $70 million a year by 1935.
• Build your own alternative before you ask for better terms. A credible option is the only thing the other side respects.
  • Steve Jobs, Pixar2:18:21 raised $140 million in the biggest IPO of 1995, and Disney then agreed to a 50/50 co-financing deal.
• Press the party that needs you, and keep the ask fair. Pressure works on need, but it breaks on greed.
  • John D. Rockefeller, Standard Oil47:50 pulled his 65% share of the Pennsylvania Railroad's oil traffic, and the railroad offered to end the war.
  • Morris Chang, TSMC34:20 gave Nvidia one fair number, and Jensen Huang accepted within two days.
• Write the protections into the contract before you need them. Handshake trust fails when the other side's incentives change.
  • Gates36:37 held out for a best efforts clause, and the arbitrator ended the exclusive license, so five or six clients were paying Microsoft within weeks.
  • Ray Kroc17:14 faced a $68,000 buyout price for a company the other side had put $6,000 into.

You had to control what you had or it could be taken from you.

Walt Disney, The Walt Disney Company

2.1 Own the asset, not just the arrangement

Rights you do not own can be taken the day you become valuable.

• Own the ground your business stands on. Sam Walton, Walmart11:35
  • Walton built the Newport store to $225,000 in sales in 1948, and the landlord refused to renew because he wanted the store himself.
  • Walton had skipped checking for a renewal clause. At 32 he restarted in Bentonville and bought the building, saying he needed control over his own destiny.
  • The Newport rent was 5% of sales, and the landlord paid him $50,000 for the franchise and assets, against $30,000 to $40,000 in annual profit Walmart's history35:15.
• Hold the IP and the contracts with your people. Walt Disney, The Walt Disney Company38:30
  • In 1928 the distributor Charles Mintz secretly signed nearly all of Walt's animators and told him to accept $500 less per cartoon.
  • Walt had no rights to Oswald, no staff contracts and no customer contract, so the studio was worth effectively zero. He then built Mickey Mouse as IP he owned.
  • Disney concluded he had to cut out middlemen39:00 and keep ownership of his creations.
• Buy the product outright when its future is the point. Bill Gates, Microsoft1:00:38
  • Gates insisted the Seattle Computer Products contract be a sale, not a license. He believed you had to own a product to control and benefit from its evolution.
  • Ownership let Microsoft sell MS-DOS over and over under its own name.
  • IBM's PC used off-the-shelf parts, so the operating system became the point of integration1:50:30. Microsoft passed IBM in market cap in January 1993.
• When a partner funds you, sell the output and keep the know-how. Steve Jobs, Pixar30:41
  • Jeffrey Katzenberg argued that Disney should own the technology since it funded the first movie. Jobs said the money was for making the film, not for buying Pixar's trade secrets, and he was ready to walk.
  • Katzenberg gave in, and Pixar kept its technology in a three picture deal.
  • George Lucas16:50 asked for Star Wars licensing and merchandising rights instead of a bigger salary. The studio thought it gave up nothing.
  • Enzo Ferrari1:16:00 let Ford's 1963 bid die because it gave Ford the last word on racing.

2.2 Give away what costs you little

Concede the thing that is cheap for you and valuable to them, and keep the right that scales.

• Trade a flat fee for the right to license to everyone. Bill Gates, Microsoft1:50:00
  • IBM paid about $430,000 in fixed fees with no per-copy royalty. Microsoft kept the right to license DOS and its languages to anyone on any terms.
  • When Compaq and other clones arrived, Microsoft charged each one per machine. IBM created the demand and the clone makers paid to capture it.
  • Gates and Allen used the same strategy as with Altair BASIC58:57. IBM accepted readily and was later criticized for giving away the store.
• Hand a hard-to-run channel to a specialist and share the upside. Walt and Roy Disney, The Walt Disney Company1:03:50
  • A handshake $300 workbook license left Disney not knowing its own sales. They hired Kay Kamen as exclusive merchandise agent.
  • Disney took 60% of the first $100,000 of royalties and split everything after 50/50.
  • Gross merchandise sales hit $6 million within six months, and royalties passed film rentals by about 1934.
• Sell your show to the buyer who needs it most, and keep creative control. Walt Disney, The Walt Disney Company2:57:25
  • The board would not fund the park, and NBC and CBS balked at bundling a park with a show.
  • Weak third network ABC put in $500,000 of equity, guaranteed $4.5 million of loans and paid $5 million a year, while Walt kept complete creative control.
  • The show ranked second only to I Love Lucy, and 83 million people watched the live opening in July 1955.
• Borrow a bigger partner's reach with a clean split. Howard Schultz, Starbucks1:23:30
  • Coke gave Schultz under 30 minutes. Pepsi's leaders shook on a 50-50 joint venture for bottled Frappuccino.
  • Frappuccino was 7% of revenue by 1996.
• If you invest, take strategic rights alongside the stake. Microsoft2:57:20
  • After Facebook's founders turned down its bid, Microsoft took 1.6% for $240 million at a $15 billion valuation.
  • It also got exclusive rights to sell Facebook's international banner ads until 2011, which fed its advertiser marketplace.

2.3 Build your alternative before you ask

Your bargaining power equals the best deal you could get without this partner.

• Raise your own capital so you can ask for an equal share. Steve Jobs, Pixar1:20:54
  • Pixar's Disney deal gave it only 12 to 15% of revenue, because Disney funded the films.
  • Jobs knew a hit would make Michael Eisner want to pull Pixar closer. To demand half the profits, Pixar needed money to cover half the production costs.
  • Pixar went public a week after Toy Story opened on November 22, 1995, over the doubts of Catmull and Lasseter.
  • Jobs timed the IPO on November 29, 19952:18:21, and it closed at a $1.5 billion market cap.
  • Toy Story grossed over $370 million, and Eisner accepted the 50-50 split a few months later.
• Run a real auction, and stop it where you want to land. Geoff Hinton, DNN Research55:38
  • Baidu offered $12 million, so Hinton ran an hourly-reset auction from his Lake Tahoe hotel room with Google, Microsoft and Baidu.
  • The three researchers cut it off at $44 million, once they decided they wanted to land at Google.
• Line up your money before you make the move. John D. Rockefeller, Standard Oil50:15
  • In 1865 Rockefeller baited his partner Clark into an auction after arranging bank financing in advance, so he had effectively unlimited resources.
  • He won Clark's 50% of the oil business for $2,500 over the bid.
  • Bernard Arnault waited out the Willot brothers because time is your friend if you hold the cash19:57. Boussac was losing 100 million francs a month, and they signed two days before liquidation.
• Design the business so no single counterparty can hold you hostage. Jim Sinegal and Sol Price, Costco2:00:04
  • Price Club took only cash and checks from day one, so customers never expected cards. Costco could later auction its card with no fear of losing shoppers.
  • At an 11% gross margin, giving three points to Visa would have flipped the business.
  • Jensen Huang kept leverage by playing manufacturers against each other1:59:10, including Samsung for the Ampere chips and open talks with Intel.
  • Chang declined to co-develop 130nm with IBM, because IBM would be the senior partner1:59:46 and TSMC would lose its own process. IBM went to UMC, which later regretted it.
• Reserve scarce capacity, and make others pay to hold theirs. Jensen Huang, Nvidia2:08:41
  • Nvidia over-ordered at TSMC and took a big inventory write-off in 2022. Then the AI wave made that reserved capacity hugely valuable, and competitors could not get it.
  • Morris Chang, TSMC1:26:17 had salespeople demand deposits and warn they could be confiscated, because customers kept asking for more wafers than they needed.
  • TSMC never confiscated money. All customers eventually used up their deposits.

2.4 Find who needs you, and time the pressure

Go to the party that is hungriest, and make yourself hard to replace.

• Take your first deal from the partner with the most to gain. John D. Rockefeller, Standard Oil30:00
  • Rockefeller targeted the smaller Erie Railroad, which needed traffic. Jay Gould wanted big refiners to lift Erie's traffic so he could manipulate its stock.
  • Later he sold shipping to rivals at better rates than they could get alone. Standard earned money on 4,200 barrels a day while refining only 1,500.
• Offer guaranteed volume in exchange for deep discounts. Henry Flagler, Standard Oil1:02:02
  • Flagler promised huge minimum shipments, which let railroads run dedicated oil trains without stops. In return they cut rates.
  • He then offered other Cleveland refiners the same rate if they pooled shipments, and the refiners fell into line.
  • The railroads could run roughly 40 cars instead of 150 for the same revenue, and the deal was kept unwritten.
• Own the thing the other side cannot run without. John D. Rockefeller, Standard Oil1:36:06
  • Standard built the tank cars and leased them to railroads at a low rate. Owning nearly all the Erie and New York Central cars meant it could cripple either railroad by withdrawing them.
• Take over the customer relationship when a middleman sits in the way. Jensen Huang, Nvidia1:25:03
  • About half of Nvidia's data center revenue comes through cloud providers. DGX Cloud puts Nvidia's boxes inside Azure, Oracle and Google data centers but sells directly to enterprises.
  • It starts at $37,000 a month for a system that costs roughly $120,000 to build.
• Make yourself the preferred customer or supplier. Joe Coulombe, Trader Joe's3:00:00
  • Trader Joe's pays suppliers cash on delivery while Costco, Amazon and Walmart pay at 60 to 90 days. That makes it the preferred customer for small vendors and secures supply for its unique products.
• Set one fair number and a short deadline. Morris Chang, TSMC34:20
  • The previous CEO had denied fault over 40nm yield problems and offered Nvidia nothing. Chang spent about half his time in his first weeks back working out a number.
  • He flew to Jensen Huang's home, offered over $100 million, and said it would not be negotiated. Nvidia had 48 hours to accept or go to arbitration.

2.5 Write the protections in

The clauses you skip are the ones that cost you when the relationship turns.

• Fight for the clause that obliges the partner to perform. Bill Gates, Microsoft36:37
  • MITS's lawyers offered reasonable efforts. Gates held out for best efforts on sublicensing the BASIC source code.
  • When Pertec bought MITS and blocked licensing, the clause let Microsoft argue Pertec was bound to promote the software.
  • The first MITS deal had given exclusive distribution for $30 a copy, capped at $180,000 lifetime. Gates learned1:03:10 that hardware makers should pay for software as part of each machine.
• Reserve the right to exit when the business is uncertain. Sol Price, Fedmart25:30
  • Price negotiated a 10 year lease but kept the right to cancel after a year, because he knew little yet.
  • He joked that it took $50,000 to open when they knew nothing and $5 million five years later when they were experienced.
• Clear the regulator before you recruit partners. Dee Hock, Visa1:24:50
  • Visa's premise was competing banks cooperating. Hock went to the Department of Justice first and argued the system was too useful to block.
  • He got a letter, and waving it answered the banks' first question.
• List your non-negotiables and put them in the deal. Joe Coulombe, Trader Joe's2:00:04
  • Coulombe sold to Theo Albrecht in 1979 on one page. Trader Joe's would not become part of Aldi, and management kept its autonomy and private label plan.
  • Joe could stay or leave as he liked, and the price was three times the earlier offer. There was no diligence.
  • Joe stayed CEO until 1988, and the Albrecht family never invested another dollar.
• Read every clause, and do not act as your own lawyer. Ray Kroc, McDonald's20:11
  • Swayed by the brothers' friendly openness, Kroc signed a contract barring changes unless both brothers signed and sent them by registered mail. They never did, even after approving changes by phone, so he was in default from the start.
  • He agreed to 1.9% of franchise gross sales, with half a percent going to the McDonald brothers.
  • Earlier he gave away 60% of his multimixer company for $6,00017:14, then mortgaged his home to buy it back and was left about $100,000 in debt.
  • Edison28:05 sold his stock ticker improvements at 22 for almost nothing. The lesson is that you can't make a good deal with a bad person.

2.6 Do not overplay your hand

Leverage is spent by greed, no-shows and too many demands, so ask for little and show proof.

• Show up and follow through when you need the partner. Steve Jobs, NeXT33:54
  • NeXT was on track to burn $54 million that year. Jobs turned around on the way to Dallas after a slide problem and left a colleague to present alone to 800 IBM engineers.
  • IBM read the no-show as a lack of commitment, and the new $30 million deal died.
  • The biographers43:24 add that Jobs held up a new IBM executive for more money, and the executive stopped taking his calls.
  • Jobs later said he had learned from this, and his advice was "Never overplay your hand."
• Do not let principle kill a deal you need. Steve Jobs, NeXT34:26
  • With a contract on the table that could unlock hundreds of millions in government sales, Jobs refused to come out of his office to meet the Perot Systems CEO. Ross Perot stopped believing in the company.
• Do not root against your partner. Michael Eisner, Disney2:27:50
  • Eisner told the board that a flop on Nemo would help Disney's negotiating leverage. Early reels are always rough at Pixar, and the memo leaked, so Jobs ended talks in January 2004.
  • Nemo grossed $871 million in theaters.
• Do not squeeze a customer so hard that it builds its own alternative. Qualcomm1:48:40
  • Qualcomm asked Apple for about $7.50 per phone and a $1 billion penalty for using another modem supplier. Apple waited for a credible rival in Intel, then sued in 2017 alongside the FTC.
  • Apple paid about $4.5 billion in the 2019 settlement, and Qualcomm expects almost zero Apple chip revenue after 2023.
• Keep your demands to the few that matter. Steve Jobs, Apple58:37
  • Jobs asked Microsoft for two things: a public five year Office commitment and $150 million, in exchange for dropping patent litigation. Gil Amelio had wanted six things and kept Gates on the phone over the holidays.
  • Jobs won Apple's OS deal by showing working code49:52 against Be, whose founder arrived with no team or demo. Apple bought NeXT for $10 a share after a five minute price talk.

2.7 Where they differ

Some tactics fit only some positions, and the sources disagree on how hard to push.

• Handshake or paper.
  • Hans Wilsdorf, Rolex21:10 ran his supply chain on a handshake with Aegler for about seven decades, until Rolex bought the firm in 2004.
  • Gates and Kroc, above, show the clause you skip is the one you need, and Flagler also kept his railroad deal unwritten Standard Oil's history1:02:02.
  • Trust worked where both sides kept gaining. It failed where one side's incentives changed.
• Own it yourself or share it.
  • Elon Musk1:06:34 lobbied China for years to let Tesla build without a joint venture, and won in 2018, because he does not share control.
  • Schultz took a 50-50 joint venture with Pepsi, and Nvidia1:59:10 lets TSMC fab its chips and spends only about $1 billion a year on capex.
  • The split depends on whether the partner's strength is something you could never build yourself.
• Get paid first or pay first.
  • TSMC demanded deposits from customers, while Trader Joe's pays suppliers on delivery.
  • The tool fits the scarce side. TSMC was short of capacity, and Trader Joe's wanted supply for unique products.
• Sell high or sell on your terms.
  • Hinton stopped his auction at $44 million once he knew where he wanted to land, and Coulombe took a one-page deal with conditions.
  • Andrew Carnegie50:34 sold to J.P. Morgan for $480 million and later admitted he sold too cheap by 100 million. Morgan replied, "very likely."
• Squeeze or stay fair.
  • Rockefeller used the South Improvement scheme as a threat and bought 22 of 26 Cleveland rivals in six weeks, and by 1877 Standard controlled 90% of the American oil business Standard Oil's history1:29:59.
  • He also threatened Mississippi grocers1:46:51 with a rival chain, which the hosts see as where the benevolence argument breaks down.
  • Squeezing worked for a dominant player with few rivals, and it pushed Qualcomm's customers to build their own.