I love watching Shark Tank. I subscribed to Hulu a year or so ago, and I’ve been going through every episode from the beginning. I’m currently on season 11.
I wanted to make a Shark Tank Deal Comparison calculator, but other than a straight equity comparison deal, I’m not sure how to approach it. I’m trying to get my head around the considerations. Here’s where I am.
In case you don’t know how the show works, in Shark Tank, business owners make a pitch for money to five potential investors, and hope to get a deal. What I noticed is that it’s really tough for some of the business owners to compare deals when the type of deal the ‘Shark’ is making is different from the next Shark.
Here are types of deals I’ve noticed thus far.
Straight equity deal
This is the most straight-forward deal, and it’s what the business owners ask for initially when they walk out to the floor. PERSON asks for $XXXXXX in exchange for %XX of their business, BUSINESS. That means when BUSINESS makes a profit and decides to issue dividends to the owners, the investor gets XX% of that, every time that happens.
So when SHARK1 offers $XXXXXX but wants %XX in return, but SHARK2 offers $SAMEAMOUNT but wants %YY in return, it’s pretty straightforward to compare the two deals.
Then Kevin comes along with a royalty deal
Kevin is the shark known for coming up with offers that aren’t the straight equity deal, and one of those ways is through a royalty. Suppose BUSINESS sells ITEMS at $PRICE and makes them at $COST, Kevin might determine that there is enough difference between $PRICE and $COST there that he would want $X for every single ITEM sold. Usually he does this while saying he still wants equity in the business, but quite a bit lower amount of equity than if he were doing a straight equity deal.
This method tends to break people’s brains, and so far I’m not convinced that anyone who has taken him up on a royalty deal didn’t do so out of desperation or without fully understanding what they were getting into (I don’t care what he says about Wicket Good Cupcakes). It’s hard to compare a royalty deal to an equity deal, as they aren’t apples to apples.
Though exceptions exist, the business owners seemed to have gotten savvy to this in later seasons and there’s a rehearsed line people give Kevin that it makes no sense to do that because it affects their short-term cashflow.
Debt deal
I’ve picked up on the fact that if the business owner has asked for a certain amount, the sharks can’t offer less. For example, if a business owner’s initial offer to the sharks is $100,000 for 20% of the business, but a shark doesn’t think that’s worth it, the shark can’t come back and say, “I’ll give you $60,000 for 20%”. Instead, the shark may ask for more equity instead. (“No, but I’ll give you $100,000 for %40.”).
Another way they get around this restriction of cash offers is by offering debt. “I’ll give you $50,000 as a loan to your business at 8% interest that you need to pay me back in 3 years, and in exchange for me being your bank, I’ll also take that 10% of the business you’re asking about.” Some business owners take this deal, as they want a business loan anyway and want to minimize the amount of equity they are giving.
While that seems to be a more acceptable offer back to business owners, it can be challenging to compare to the straight equity deal or the royalty deal when it comes to making a calculator.
One shark vs another
If you get the same offer from two different sharks, which one do you pick? I’ve noticed some businesses will sacrifice more equity to get a particular shark as their partner. Can a calculator account for the shark’s distinctive capabilities and appeal?
Multiple sharks
Sometimes two sharks will offer a deal together, and then claim that because it’s two sharks, they are now worth MORE THAN twice as much. This is something hard to quantify. It’s similar to the ‘one shark vs another’ issue.
Licensing deal
For a handful of new inventions, or patented innovations to existing products, the sharks will sometimes go for a licensing deal. This is where they ask the business to stop selling their product direct to consumer, and instead get other businesses who might want to use their innovation to pay the business owner (or just patent holder at this point) a small percentage of all that other company’s sales that used the innovation.
So the shark may offer money to get a percentage of the business but with the stipulation that the business owner stop selling product, and instead get other companies to sell the innovations for them.
I guess in typing this out, this is still an ‘equity deal’ kind of deal. But since many times this forces a business owner to completely rethink their business on the fly, it can be difficult for them to consider a deal with that kind of requirement.
So maybe this doesn’t factor into a calculator at all.
How Existing debt affects deals
Sometimes sharks will ask “how much money do you owe the bank”, and the business owner will say a big number like a million dollars, and suddenly the attention changes. Existing debt does affect valuation. The question is whether it can be factored in a calculator, and I think it can be.
You take the value of the company (which may be their net profits x 3 or something like that), then subtract the debt, and that may leave you with an equity value. Sometimes that’s negative. And sharks don’t want that - your debts have to be paid before they start getting any returns (unless they do a royalty deal like what’s mentioned above).
The good news is, existing debt can be accounted for in a calculator.
Business owners who have already given away equity
There are some business owners who have a good business, but for whatever reason, have had to give away equity in the past to others. Instead of owning 100% of the company, maybe now they just own 40%. Sharks get hesitant about this as well, as they don’t want to take so much more percentage away from the business owner, that the business owner is only left with too small of equity amount. If the business owner is left with only 5% of their company, they might start thinking “this isn’t worth it anymore” and stop selling, therefore the shark makes no money either.
It’s not a different deal type, but it does heavily influence the deal. I think a calculator could account for this part.
Thanks for reading
So while I don’t have a calculator yet, I do enjoy thinking about this. I’ve got more Shark Tank to watch!