A good friend of mine, Farzad, is a fan of shark tank. After a discussion with him I decided to start watching shark tank. Frankly, it is painful. Having worked at two VCs, shark tank is, ehhh, borderline idiotic. But there is a something that really bothers me about the deal -- besides valuation.
Kevin Oleary's royalty deals are basically loan sharking! Here how it goes.
I give you the money you want -- say $100K (on $1Mil post money). But I don't want any equity. Instead, you give me $2.50 on each item you sell for $10, until I am fully paid. Then the royalty goes down to $1.25 per item after that forever!
Here are just a few problems with that deal. Lets say your product has a 50% profit margin. you need to sell 40K units to give O'Leary his money back, so far no problem. But in effect O'Leary now owns 50% of your business while he is getting paid back! People who take equity are entitled to sharing the profits and not the revenue; and that is after the debts are paid. With the royalty deal, everything is suddenly debt. Even if not, the initial $2.50 royalty out of the $5 profit amounts to 50% equity. The later $1.25 royalty will be 25% of the company long term.
Doing a quick math, the initial post money is only $200K, and later it is $400K in valuation!
But what is worse is that the royalty stops anyone from doing an M&A! Anyone who wants to buy the company will now have to pay the royalty, a complete deal killer. The royalty holder can take the company hostage and demand any percentage of the deal they want.
OK so a new update.
ReplyDeleteI am still watching the show, when I get a chance. It is part because I think I should. But it is still painful, frankly.
I Kevin O'Leary is still a Stupid Self Absorbed Asshole and the closest thing you get to a fucking leach.
I think the show sends a bad message on how influence and networks -- as important as they are -- have a greater value than creativity, hard work, and good ideas.
On the positive side, it does show that you do not have to be bright to be a rich. It reminds me of my time and Angels' Forum and how stupidity and grid overtook reason and rational.
Oh ya, my favorite person on the show is Mark Cuban followed by Daymond John.
#KevinOLearySucks!
I am ashamed this bald asshole is also a Canadian.
OH and one more thing.
ReplyDeleteI think the producers will do a better job if they went to Silicon Valley or New York, where valuations are more real, products are more interesting, and VCs are more professional.
People would enjoy the higher valuations, and route for both the entrepreneurs (like game show winners) and those investing in them.
#KevinOLearySucks
OK so a new update.
ReplyDeleteI am still watching the show, when I get a chance. It is part because I think I should. But it is still painful, frankly.
I Kevin O'Leary is still a Stupid Self Absorbed Asshole and the closest thing you get to a fucking leach.
I think the show sends a bad message on how influence and networks -- as important as they are -- have a greater value than creativity, hard work, and good ideas.
On the positive side, it does show that you do not have to be bright to be a rich. It reminds me of my time and Angels' Forum and how stupidity and grid overtook reason and rational.
Oh ya, my favorite person on the show is Mark Cuban followed by Daymond John.
#KevinOLearySucks!
I am ashamed this bald asshole is also a Canadian.