In investment negotiations, how can one identify the counterparty's true underlying interests using first principles?

Bro, that's a great question, and it's not as mysterious as it sounds. The term "first principles" might sound intimidating, but simply put, it means "digging deep to find the fundamental purpose." At the negotiation table, don't just listen to what the other party says; ponder why they're saying it.

Let me give you an analogy: it's like two kids fighting over an orange. Both immediately say, "I want this orange!" This is their position. If you intervene directly, the "fairest" solution might be to cut the orange in half, one for each. But what's the result? Both kids might be unhappy.

However, if you apply first principles and dig deeper, asking, "What do you want the orange for?" One child says, "I want to drink orange juice." The other says, "I want to use the orange peel to bake a cake."

See, now the problem is clear. Their true needs are different: one wants the pulp, the other wants the peel. These two needs don't conflict at all. The best solution is to juice the pulp for the first child and give the peel to the second. Both are 100% satisfied.

Back to investment negotiations, the principle is exactly the same.

An investor might bang the table and declare, "I must have a 30% stake, and the valuation cannot exceed 50 million!" This is their "position," just like "I want the orange."

At this point, don't rush to argue about valuation and equity. You need to be like the adult who asked "why," and ponder their underlying "true needs." How do you do that?

1. Keep asking "why," but phrase it nicely.

• If the other party says: "I must have 30%."
  • You can't directly retort: "Why?"
  • You can rephrase it: "Mr. Wang, I understand you have great confidence in our project and want a larger stake. Could you share what specifically the 30% figure means to you? Is it about achieving a certain level of decision-making influence, or is it based on your investment return model calculations?"
• If the other party says: "The valuation is too high, 50 million at most."
  • You can ask: "Mr. Li, internally, we've based our valuation on the next three years of business growth and market positioning. We'd be very interested to hear your perspective: what key factors led you to a 50 million valuation? Are you concerned about risks in any particular area?"

Through these "inquisitive" questions, you can peel back their layers one by one.

2. Identify their true "fear" and "greed."

An investor's decisions are primarily driven by these two forces. Their true needs are often hidden within them.

• Why do they want a 30% stake?
  • The need might be "control" or "security" (fear): They might feel that below this percentage, they won't have a "veto right," and if things go wrong, they can't stop it, and their money will be wasted.
  • The need might be "return on investment" (greed): Their fund might have a minimum return requirement (e.g., an 8x return), and based on their exit model, they calculate they need to hold that much equity.
  • The need might be "internal accountability" (face/rules): They might have made a commitment to their LPs (Limited Partners) or investment committee that this project must hold a certain percentage.

3. How to verify your guesses?

You can propose some "hypothetical" solutions and observe their reaction.

• If you guess they are seeking "control":

  • You could say: "Mr. Wang, we fully understand your concerns about capital security. What if we design voting rights and equity percentages with some special provisions? For example, granting you a veto right on certain major decisions (like company sale or founder exit), but slightly adjusting the equity percentage. Would this direction be worth exploring?"
  • If they show interest, you've hit the mark. It indicates they don't necessarily want the "30%" figure, but rather the substance of a "veto right."

• If you guess they are seeking "return on investment":

  • You could say: "Mr. Li, I understand your expectations for returns. How about we add an earn-out clause? If our performance reaches a certain target in the next two years, we'll stick to the current valuation; if not, we're willing to reduce the valuation by 20% or transfer a portion of equity to you at no cost. Wouldn't that secure your return?"
  • If they start discussing the details of the earn-out clause, it means you've grasped their need for "return certainty."

To summarize:

Don't butt heads with the other party over their "position." View the conditions they propose (valuation, equity, terms) as "symptoms." Your job is to continuously and skillfully ask questions to uncover the underlying "root cause" (their true needs).

This "root cause" is nothing more than: I want security, I want high returns, I want control, I want to save face in front of my boss/LPs.

Once you find this fundamental reason, you can step outside the framework they've presented and design various innovative solutions (such as adjusting voting rights, adding earn-out clauses, designing different classes of equity, etc.). Just like sharing the orange, you can satisfy their core needs while also protecting your own interests. That's the mark of a master negotiator.