Last year, I really got into the ABC program Shark Tank. After a few episodes last season, it was no longer on. I totally forgot about the show. Thankfully, my DVR didn’t.
On Sunday evening, I decided to see what wonderful TV program presents my DVR had in store. Yes, two new episodes of Shark Tank were there waiting for me. I sat down to watch episode 202 from 3/25/2011. Of all the episodes, the entrepreneurs on this night had the sharks in a frenzy. Several interesting ideas were presented including Toygaroo (think Netflix for toys) and Wake-N-Bacon–an alarm clock that cooks bacon bedside. Toygaroo accepted an offer from the sharks.
The capper of this version of the tank ended with First Defense Nasal Screens. When I heard what the inventor was asking for and after I saw the product concept, I started laughing. And then, the guy shared that he has a contract in place for a HUGE order. The sharks and I started paying attention. Offers started coming from multiple sharks: $500 for 20% equity and 15% royalty, $1M for 30% equity and 10% royalty, and then the kicker. One shark offered the inventor $4M for the company and was willing to pay the inventor 10% royalty.
The inventor DECLINED the $4M offer because he felt the company was worth $5M.
However, other sharks teamed up to offer $750K for 30% equity and 10% perpetual royalty, which was accepted.
Did the inventor make the right move? I guess time will tell.
What would I have done? Accepted the $4M. Here’s why:
- The inventor had put up $600K of his own money, with another $400K from friends & family. Had he accepted the offer, the inventor and all investors would have had a pretty decent ROI.
- If the product were to take off, the investor stood to make a pretty decent royalty of 10%.
- I could probably figure out how to live pretty comfortably with an extra million or two.
But the inventor believes this is a multi-billion dollar market. Maybe he’s right.