Shark Tank [Equity Financing]

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djs051085
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Joined: Thu Jun 27, 2013 2:05 pm

Shark Tank [Equity Financing]

Post by djs051085 » Fri Mar 21, 2014 11:56 am

Hi All - I sometimes think about starting a business and I have some questions as it related to equity financing.

I've seen that show shark tank on CNBC where the "gurus" buy an equity share in someone's company and I guess I'm a little confused about the actual transaction that takes place.

For argument's sake, let's say that I take my personal savings and use it to start a business (I imagine this is the way most start-ups begin at some point). I invest $10,000 of my own money and I would record $10,000 in shareholder's equity on my balance sheet - representing 100% of my company value. The company grows substantially, netting an amazing return on equity and the company book value is now $100,000. However, a substantial amount of the book value of the company is in fixed assets and low cash flow is hindering company growth so I decide to sell 25% of my company for $25,000.

Here is my question: As 100% owner in the company, doesn't the sale of my 25% equity represent a liquidation of MY personal portion of the company and wouldn't those funds go to MY personal account and not the corporate/company account? I mean if I was going to sell my entire company I would expect someone, under the assumptions above, to pay ME $100,000 and take control of the company. Selling a portion, I would have had something worth $100,000 and sold $25,000 of it so that $25,000 should not then go to the corporate account to invest in new ventures and benefit all shareholders ...

To raise corporate funds via equity, would I sell my personal equity portion and then write myself a payable note?

Thanks all.

freddie
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Joined: Sat Feb 08, 2014 11:06 pm

Re: Shark Tank

Post by freddie » Fri Mar 21, 2014 12:18 pm

Only if you sell your equity stake. Normally more equity is issued (i.e. you have 100k shares and the company issued 100k more for the new investors) and your ownership is diluted.


djs051085 wrote:Hi All - I sometimes think about starting a business and I have some questions as it related to equity financing.

I've seen that show shark tank on CNBC where the "gurus" buy an equity share in someone's company and I guess I'm a little confused about the actual transaction that takes place.

For argument's sake, let's say that I take my personal savings and use it to start a business (I imagine this is the way most start-ups begin at some point). I invest $10,000 of my own money and I would record $10,000 in shareholder's equity on my balance sheet - representing 100% of my company value. The company grows substantially, netting an amazing return on equity and the company book value is now $100,000. However, a substantial amount of the book value of the company is in fixed assets and low cash flow is hindering company growth so I decide to sell 25% of my company for $25,000.

Here is my question: As 100% owner in the company, doesn't the sale of my 25% equity represent a liquidation of MY personal portion of the company and wouldn't those funds go to MY personal account and not the corporate/company account? I mean if I was going to sell my entire company I would expect someone, under the assumptions above, to pay ME $100,000 and take control of the company. Selling a portion, I would have had something worth $100,000 and sold $25,000 of it so that $25,000 should not then go to the corporate account to invest in new ventures and benefit all shareholders ...

To raise corporate funds via equity, would I sell my personal equity portion and then write myself a payable note?

Thanks all.

barnaclebob
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Joined: Thu Aug 09, 2012 10:54 am

Re: Shark Tank

Post by barnaclebob » Fri Mar 21, 2014 12:34 pm

Yeah shark tank doesn't get into the dilution vs sale of equity issue, probably too complicated for the average viewer. Does anyone know if their deals are normally through dilution or sale of equity? I'd assume dilution since sale of equity doesn't really do anything for the business.

Valuethinker
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Re: Shark Tank

Post by Valuethinker » Fri Mar 21, 2014 12:34 pm

Normally angel and venture investors will never invest if the Founder is taking money off the table. All the money they put in has to go to developing the company.

Look at it from their point of view. The company is highly risky and they are betting on the abilities and drive of the entrepreneur. Why would they want to let someone else just take their money? Without a return for it? And why would they seek to reduce the alignment of interest between entrepreneur and them, an external and usually minority shareholder?

Unless you are getting through to say B round, or exiting the company entirely, it's unusual for Founders to be able to take anything off the table.

djs051085
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Joined: Thu Jun 27, 2013 2:05 pm

Re: Shark Tank

Post by djs051085 » Fri Mar 21, 2014 2:08 pm

Thanks Freddie, Bob, and Value. It makes sense to me now.

This all ties into "pre-money valuation" and "post-money valuation".

In an equity sale, a company worth $100K owned by 1 person selling 50% would still be worth $100K and the seller takes $50K for himself.

In a dilution sale, a company issues new equity of $50K and the $100K company becomes worth $150K, with the original owner owning ~66.7% and the new owner picking up 33.3%.

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Don Christy
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Re: Shark Tank

Post by Don Christy » Fri Mar 21, 2014 3:32 pm

From my experience, there's certainly the possibility of something between the two scenarios. The original shareholders, or some portion of them, could have a liquidity event as part of the transaction. Or one or more managers could have a "bonus" as result of closing the deal. But I agree that in most cases all of the new $ basically stays in company.
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freddie
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Re: Shark Tank

Post by freddie » Fri Mar 21, 2014 3:56 pm

My experience that happens more in profitable companies (or companies that have done a lot of growth) than in concept stage start ups. There have been a couple of shark tank offers that were buyouts (owner gets cash, sharks get the company) but in general most investors want to make sure the person running the company is focused on it being a success.

The shark tank really doesn't do deals. They agree to talk about doing a deal:)

Don Christy wrote:From my experience, there's certainly the possibility of something between the two scenarios. The original shareholders, or some portion of them, could have a liquidity event as part of the transaction. Or one or more managers could have a "bonus" as result of closing the deal. But I agree that in most cases all of the new $ basically stays in company.

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