Kevin H. and Barbara both invested this week, putting up $285,000 for an average stake of 75% in two companies. Kevin actually bought a product outright in addition to offering a royalty stream to the inventor.
This week’s big lesson is: be willing to part with equity in exchange for money and expertise. Jeff & Josh Cohen, owners of The Voyage Air Guitar asked for a staggering $500,000 for just 5% of their company. Their request values the company at $10 million, even though last year’s sales were only $400,000. That’s 25 times gross sales! These entrepreneurs have forgotten that the investors are buying something from them. If they price their company out of a reasonable range, the investor doesn’t stand to make any money at the end of the day. Why would any investor buy a company that won’t make them wealthier?
Obviously, this business needs the money and I’m sure the expertise would be nice as well, especially when Kevin H. offers to bring in his experience with infomercials. Be reasonable when you value your company and know how much you’ll need to give up in order to get what you need to take you to the next level. If you’re not willing to part with a fair portion of your equity, then you’re wasting investors’ time. Go to a bank, get a loan, factor your receivables, float a bond, find a line of credit, negotiate with suppliers and customers, and do whatever else you can to get the necessary capital without giving up your equity, if that’s what’s important to you.
EDIT: Just as a fun comparison, the average equity stake the Sharks have negotiated through Episode 8 is 52% and the highest valuation for a single company is still $1 million, set back in Episode 2.
——-
Shark Tank airs on ABC, Tuesdays at 8/7c
