Over the last few months I’ve been involved directly, or indirectly, in a number of negotiations. They’ve had their ups, downs and movements of sideward sliding into anarchy – most negotiations do.  What has struck me mostly is that each of them was fundamentally driven by the concept of fairness.  And, often, what is fair is determined by context – the various factors that lead a negotiator to think that his position is fair.  Understanding the drive to fairness and context is essential to getting to a deal.

In commerce a “deal” occurs when two parties agree to do something together for economic benefit. There needs to be an exchange of something for a value for a deal to occur. Note that there are plenty of situations where people agree to do things together (attending a ball game or a play, or going to a picnic), but when commerce is involved a deal requires an exchange of economic benefit from one party in exchange for something of value from the other. So, for example, if I promise to wash your car and you promise to pay me – that is a deal. Or, if you promise to hire me to provide consulting services in exchange for my agreement to hire you to write code – that is a deal.

If you think about it for a moment any start up is really a collection of deals, from the beginning until the business is sold or closed. The leasing of office space? Deal. Hiring an employee?  Deal. Selling a product? Deal.  Borrowing money from a bank?  Deal. Get the picture? If you trade something of value for something of value, you are doing a deal. OK, so now that I have entrapped you in a discussion of the obvious, why does this matter to you as an entrepreneur?

Deals do not occur in a vacuum. Deals are shaped by a number of external factors – rules that govern the creation of deals (e.g, laws), customary market practices (“that’s the way we always do these things”) and social norms of behavior.  The perception of how these factors affect the deal’s terms (i.e., what and how parties exchange value) is largely a personal matter for each negotiating party. This is where context and fairness come into play.

A fundamental driver of deals in our prevailing business culture is the concept of fairness. Consider this – when you deal with anyone in commerce are you driven to do a deal that you think is unfair to them or you?  What do you think of someone who does a deal with you that turns out not to be fair?  Do you want to deal with them again? It’s something that all of us do without realizing – we seek fairness. This is particularly true in two circumstances, where a deal between two parties will have a likely affect on a person’s ability to do future deals with others (i.e., how a persons conduct in one negotiation affects his “reputation” – whether others will want to do a deal with him in the future) and where the parties have a choice whether to do a deal or not. This, of course, means that when deals are “one offs”, or where one party needs to do a deal, questions of fairness will be less important or non existent.

Here is a nuance that is important – fairness is not the same as legality. You can agree to do an unfair deal under the law, provided it is not prohibited by law.  Fairness is driven much more by customary practice and social norms. Fairness is both parties of a deal feeling that their concerns were acknowledged and the resulting deal reflected a proper compromise of their respective requirements for the deal.

So in order to get a deal done you need to do three things: (i) determine if either party has to do the deal (in which case questions of fairness will be governed, if at all, by reputational concerns); (ii) determine what would make the other party think a particular deal is fair and (iii) think through what would cause you to think a deal is fair. The more parties share a similar view of (ii) and (iii), the more likely they are to do a deal. The issue, of course, is that with a few exceptions spread at carnivals around the US, none of us are mind readers. Therefore, the ability to really know the other party’s true view on a fair transaction is extremely difficult to determine. That is the essence of commercial negotiation, of course, learning what the other party needs for a deal to occur.

In the absence of mind reading, the best alternatives are to understand context and projection. Projection is seeing the best you can the other party’s requirements, as if you were in that position yourself. Context is the framework through which we see fairness. For example, if a entrepreneur does not understand that bank loans for entrepreneurs usually require a personal guaranty, the entrepreneur will feel that such a requirement from the bank is unfair. And, conversely, the bank will be mystified that its “fair” requirement for a guaranty – a normal and customary requirement for an entrepreneur loan – is not well received. As my Dad used to say, “Fair is where you sit.” The more negotiating parties have a shared sense of what is fair, the more likely they are to do a deal and be happy about it.

You find context by looking at what is customary and expected in similar deals. What do people usually do in similar situations? This does not mean that you have to do what is customary, but understanding and justifying diversions from the norm is very important. The point is that to do a deal without sharing context is to put yourself in a situation where the gulf between parties is unlikely to result in a deal (unless, of course, one party has to do the deal).

How do you determine context? The best way is to speak with people who have done similar deals. One of the biggest reasons why advisors (Board of Advisors, professional advisors and Board members) are important is because they will help you understand context. Once you understand context, you can then determine if your deal party shares the same context.  If he does, then a deal will be easier to do.  If not, then you will need to take the time to share your context with them and see if you can implicitly agree on context. You don’t have to be a mind reader, but you will have to be insightful and patient.

The important point is that creating a deal is not about imposing your will on another.  It’s about understanding what you share in common, and bridging the remaining differences in a way that will allow both parties to feel that the result is fair.  Understanding context might not allow you to read minds, but it will make you more likely to get good deals done.  And, since a business is a long string of deals – the better the deals, the better the business.