Walk Away Sun Microsystems

In 1983, Sun Microsystems was still in its starting out phase. Its two cofounders, Vinod Khosla, and Scott McNealy wanted some financing. They started pursuing a Fortune 100 company which saw benefit from the possibility of accessing Sun’s technology.

Here’s what went down. Vinod and Scott met with the CEO of that Fortune 100 company and they agreed on a 10 million investment for a 100 million-post money valuation. Both groups shook hands on the deal. The perceived last step was for the pair from Sun to fly out to Chicago the following week to hammer out the terms.

Sounds good so far, so what happened next?

When the pair flew out to Chicago the following week to finalize with the CEO, to their surprise, they saw the CEO, but this time he was flanked by bankers and lawyers. Vinod and Khosla were a little dumbfounded. Concern was growing that whatever they agreed to prior might have gone out the window. Their concerns were correct, the Fortune 100 company wanted to renegotiate the numbers that were previously agreed to.

Vinod did not have the appetite to renegotiate. The Sun founders believed that the deal supposedly agreed to before was quite reasonable. Vinod requested that the CEO and the legal team take some time to think things over while he and Scott would leave the room. When they returned, it turned out that nothing had changed, the Fortune 100 company wanted to still negotiate the numbers.

At this point, the Sun founders thought there was a breach of process and decided to leave instead of negotiating further. They flew back to San Francisco with no deal. They resisted the urge to make contact with the Fortune 100 company for the next few days.

The resistance worked! The following week, the CEO called the Sun Founders and agreed to all the original terms. The teams met and eventually finalized the deal for good.

Was it a risky strategy by Sun to walk away initially?

In this instance possibly, but it worked out for Sun anyway. This case shows that there was a clear misunderstanding of the process that the negotiation would follow. Sun thought that after the original handshake things would move on swimmingly, but the Fortune 100 company didn’t see it that way at some point prior to their meeting in Chicago. This is why it’s beneficial when negotiating to have a process that can be agreed upon or at least understood so that both parties know what to expect and when a deal is actually a deal.