Watch this video – remember, these are real investors, preparing to invest their OWN MONEY if the right idea(s) comes along – then answer the poll (and, please make a comment if you can … it would be great to be able to share WHY you feel that way):
I wouldn’t have given the equity away- it sounded as if they didn’t really NEED the 350K to keep their business going. They have some big customers and are getting repeat orders. They want the $ for marketing, $350K will NOT make them a household word, and I doubt it would dramatically increase their sales. Their product is in major hotel chains THAT can be their main marketing. They could use the internet to make very targeted ads for a small fraction of $350K which they should be able to do as an operating expense.
I wouldn’t give an ounce of equity away on this. You could read the sharks from the first 30 seconds that they were salivating over this. Even if it took me 5-6 more years to reinvest every penny I could into marketing and if I had to do everything I could to tell the world about that idea, including trying to land a spot on Oprah, I would do what it takes, then once the customer new I was out there, bingo.
I raised over $2.5M from investors when I was a start-up CEO many moons ago.
The rule of thumb is that you roughly give away 30% of total equity per “round” of investment. A “round” is a $ number that takes you from your current level through to your next level, e.g. product development or regional roll-out etc. What I found is that if you ask for a $1M round or a $10M round, the dilution (equity you surrender)is the same. In order to ask for $10M however, you need a company that justifies that investment. In fact, you can say that investors will give you up to 30% of what the company is worth. It is very rare that the dilution is above 40%. 51% is insane and a Bad Idea, both for investor (giving too much cash) and entrepreneur (taking too much cash).
BTW, after raising 2 rounds of 30% dilution, the entrepreneur has ~50% of equity left, not 40%. Anyone who can tell me why gets a cookie.
@Modder. They have sold .30 + .3 * (1-.3) = .51. So you need to go a little less if you are wiling to potentially give up control.
I guess you need to ask yourself are you selling an idea or a business?
If you are selling an idea (and have many to are working on), it may make sense to let someone in as a business partner and enjoy the cash cow (as they run it). But that’s changes the risk. All of a sudden your risk is around picking the right business partner, not the idea/product.
But I’ll agree with Scott. There is no reason to settle for $350K with that idea.
I would have walked. Personally, I think there are too many conditions on the way they can use the money. I wouldn’t want to be hamstrung with how this money is used. I would want creative use of the money , to grow the business the way I feel was necessary.
Also , as far as the other offers on the table, they wanted too much (controlling interest) in the business.I might be able to give up some interest,but not controlling interest.
Sorry,but I have had a business partner who had controlling interest, and My hands were tied,the business was growing extremely quickly but was not making the kind of money needed and I couldn’t convince him to raise prices, and ultimately, that business was dissolved.We went our own ways .When I see the business needs to go another direction, I don’t want to be hamstrung and unable to do whats best for the company.
It’s an either/or situation. Either I would only give away minority equity on terms that left me with control and relatively limited fetters on my ability to run the company OR the investor would have to provide something more than just a monetary investment (such as the ability to significantly expand distribution in a manner which would otherwise have been beyond me). Most private equity style investors do not have the ability to do the latter.
To a certain extent, it’s all about numbers. Sometimes a lesser percentage of a bigger business is a better deal that control over a smaller business – in particular if you can get the business to a size where it can be listed and give you the potential to exit on a higher earnings multiple than you would be likely to get as a private company.
Of course, whichever way you go, both parties will want to have the contractual protections in place to allow the business to move in the right direction and to have a clean separation if things do not work out. This is one area where spending some money on lawyers is well worth it.
Unbelievable! They made their decision on “I really like Barbara, like I really like her”. Barbara read them right “You got spunk” and at the end “…you are going to be happy”.
I would have read their body language and not settled for less than 700k.
If they refused, I would thank them for their time and leave. I would take their “free advice”, and spend all of my money on “the development of the product”.
I would give away equity only to the point of still being in control.
If I take 40% for $350k and I am confident that with the 350k, I will be able to grow the revenue from the present $200k to 3 or 5 fold, I would be asking for 3 or 5 times (ie ($350k/4)*3= $262.5k for the remaining 10%(should i need it) or I could sell the whole company at an even higher price.
Giving equity away is expensive (especially when it is a controlling stake).
The shark tank is a great show, the banner between the prospective start ups and the sharks is always interesting to say the least. The sharks always go straight away for the equity in the company, control is what they are about. Once they have the control they can take it to the next level. In this case, I would go for letting them take control over an extra 100K in my pocket, the sharks have the skills to the next level.
I’ve watched some episodes and it’s funny there are guys coming into the door asking for $75k for 15% stake when he’s already doing $500-600k gross profit margin on his online business!
And how come these MILLIONAIRES are investing and deliberating like a mini-aires over $50k or $150 or even $300k?? It makes no sense at all.
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I like #4. I think this started in the UK, then Canada, now US… but what happened to the name of the show and the girl?
@ Ill Liquidity – It’s still called Dragon’s Den in the UK, but Shark Tank is a MUCH better name, don’t you think?