Hosts Robert Herjavec, Lori Greiner, Daymond John, Kevin O'Leary and Executive Producer Clay Newbill... [+]
This morning the New York Times reported an interesting piece of information about Shark Tank, the popular ABC show where business owners pitch their companies to a group of high-profile investors, including billionaire Mark Cuban. Just for appearing on the show, owners agree to give up 5% of their company or 2% of future royalties. (This information was originally reported in a September blog post by Ami Kassar.)
The idea is that exposure to seven million viewers, along with business advice from top entrepreneurs, is worth that much. Instinctively, this strikes me as a bad deal—another example of founders undervaluing their equity and future earnings early in the game. And it fits with an overall theme of the show, where business owners give away shockingly large chunks of their companies for paltry sums of cash. One cringe-worthy example: Jay Kriner of BevBuckle gave up half of his company for $50,000. Why not just sell the whole thing and start over at that point?
The lesson I generally take away from Shark Tank is that owners should never get into an investment discussion—or any negotiation for that matter—with such little leverage. The valuations thrown around on the show are so tiny that I want to yell at these people to keep their heads down for another six months before even thinking about outside money.
But then again, what do I know?
Business owners who've appeared on Shark Tank say that the experience was 100% worth the financial sacrifice. Derek Pacque is the 24 year-old CEO and founder of CoatChex, a company that’s developed a portable, automated system for checking coats and bags at events. He turned down an equity investment from Mark Cuban when he appeared on the show in September, but still agreed to give up 2% of his young company’s annual profits—FOREVER—for the exposure.
“What other option do you have if you want to be put in front of eight million people?” he contends. So far, the deal has paid off. As the show aired CoatChex’ website saw 1000 hits each second. The exposure helped Pacque land deals for events run by American Express, NBC (oddly) and Mercedes Benz. The company has since since raised $200,000 in angel funding at better terms than those offered on the show, and moved offices from Bloomington, Ind. to New York. “There are a lot of meetings that people took just because we were on the show,” Pacque says. “For these young companies it makes total sense."
Phil Dumas agrees. The 31 year-old is the founder and CEO of UniKey, a Florida-based company that’s developed technology to connect smartphones with door locks. He says the experience was, “absolutely worth it,” but warns that the exposure can go both ways. “They can make you look terrible. You have to be aware of that risk.” Dumas says he answered the sharks’ questions before they finished asking them to make sure that producers couldn't cut to a stumped, “stupid look” on his face.
Before appearing on Shark Tank, Dumas had been in talks with Kwikset, a large lock manufacturer. The show aired on a Friday in May last year. An executive from Kwikset called him the next morning. The two companies closed a licensing deal the next month. "The show really lit a fire," Dumas says, "That deal is our whole company."
Though worth it in hindsight, Dumas says that he wasn't completely comfortable giving up equity or future profits. “Do I think it’s a little greedy for the show? I think so,” he says.
Another source mentioned that Shark Tank won't be asking for profits or equity from companies appearing on the next season, possibly because of the negative attention such deals might attract. And both Pacque and Dumas say that no one has yet formally asked for the 5% equity or 2% share of profits. Representatives from ABC weren't immediately available for comment.
