sharktank2For a long time I’ve felt like I must be either the first or last entrepreneur to discover the ABC series Shark Tank.  For the uninitiated, it’s pure startup voyeurism: a company stands in front of a panel of five plutocrats, pitches, and either gets an investment or gets laughed off the stage.

It wasn’t until Jeremy Liew’s great review of the latest episode that I realized I wasn’t alone.

But watching Shark Tank, I find myself grimacing repeatedly.  It’s like nobody pitching has ever read a half-decent book on negotiation. I keep seeing the same mistakes, over and over again.  Here are the three worst.

Negotiate

By far the most embarrassing mistake any of these poor companies make is actually failing to negotiate.  They show up and make their pitch. They get asked some questions. Suddenly, the sharks are piling on about what’s wrong with the deal. The entrepreneur is visibly flustered.

sharktank33Suddenly, one of the sharks floats an offer. Maybe a second one joins in.

You can see the look of gratitude and relief on the entrepreneurs face. How gracious of them to offer to invest in their flawed child! How generous of them to help.

Pshaw.  None of these folks are chumps or charity cases. Do you know why they trash your business before making an offer? So you’ll take the offer. It’s not one of the nicest negotiation techniques, but it’s plenty effective.

Here’s the simple rule. If someone makes you an offer, it’s because they’re interested. If they’re interested, you should negotiate. Not accept; negotiate.

Of course, there are right ways to do this and wrong ways to do this. You’ve seen plenty of entrepreneurs on the show (and in life) start grandstanding about company value, only to have the Shark shake their head and declare themself “Out”. Don’t do that. Don’t be ridiculous.

Instead, make a reasonable and polite counteroffer.  “I’m really excited by the prospect of working with you. How about 20 percent?”  Even if they appear to be tottering on the edge of leaving the deal (and remember that they have every interest in making you think they’re about to bail for maximum negotiating leverage), a polite response like that won’t hurt anything. The worst you’ll get is a “no,” and now they know that you’re not a total pushover.

And of course, if you’re a hot item — if more than one shark is interested — make them bid! Get them each to give you numbers, and don’t let them collude to drive your price down. With multiple offers, use a line like this: “Each of you would be a huge asset here, but my goal here is one fully-committed partner and the best deal for my shareholders.”

Know what you want

You’re going to come in with something clean and simple, like “$50,000 for 10% of the company.” They’re going to counter (because unlike the contestants, the Sharks always negotiate) with something like “$100,000 for 8% and a 5% royalty.”

When this happens, people get this funny look on their face, like Mr. Wonderful just sprouted wings and started handing out gumdrops. There’s no excuse for that. The Sharks have a limited array of tricks up their sleeve, and you should have considered all of them before setting foot in that room. Here’s the exhaustive list (please comment if I’ve missed one):

Stake size: The most obvious. They’ll offer the same money in exchange for more of the company. This is easy to plan for by deciding ahead of time on the worst case dilution you would accept.

Controlling interest: If the ownership is 50%, then no major decisions can happen without both you and the Sharks agreeing. If it’s 51%, then they can fire you the next day and liquidate the company if they think that’s a good idea. And don’t fool yourself – if things are going sideways, they probably will. Decide what you can live with. If it’s 51%, remember the words of Mr. Wonderful: “I can fix you, but you probably wouldn’t like how I would do it.”

shark-casepops
Photo via Casepops

Number of Sharks: Most entrepreneurs get giddy over multiple investors (or, as they’re known in the startup parlance, “party rounds“). Truth is, if you have more than one or two Sharks in the deal, you’re getting a lousy deal. First, because each of them has a comparatively small stake, and therefore a small incentive to help.  Second, because if you’re in a bind, each of them reasonably expect one of the others to help out (the Bystander Effect). Third, because the alternative to being in the same deal is offering competing deals – since that didn’t happen, you almost certainly took it in the shorts on valuation.  There’s only one situation where multiple sharks in the offer is good: when they are getting a 50% or greater interest.  That’s because while one person with 51% runs the company, two people who split the round are each just 25.5% owners. If I was giving up 51% of my company, I’d want that stake split between as many Sharks as I could get — since my vote, plus any one of theirs, would constitute a majority.

A royalty: You should know ahead of time what kind of royalty your business can support, and realize that a never-ending royalty seriously limits the long-term viability of your company by permanently lowering your margins. And realize that once a shark gets their money back, they have a much smaller incentive to see you succeed — people are more motivated by fear of loss than opportunity for gain.

Help: Some of the sharks have specific assets that may be useful. Mark’s got stadiums and movie theaters, Damon’s got retail distribution, and so on. Many of the deals are done because the entrepreneurs want access to those networks. Do your homework before you get on so you know what help you can realistically expect from who.

Contingencies: This is the one that kills me. If they say “I will invest contingent on X”, that’s the same as saying “I won’t invest, but might change my mind if you do X”. A typical structure is that they will invest contingent on a valuable introduction to Their Friend Abe going well.  Well, real investors introduce their companies to Abe, and also Belinda, and Charlie, and Dolores, and a whole alphabet of partners because they’re committed. Contingencies are just shopping around, saying “I’ll see what my friend thinks.” Avoid offers with contingencies if you have any other options.

Don’t ever leave the room

“I’ll offer 25%.”

“I’ll offer 20%!”

“I’ll do it for just 18%!!!!… wait, could you leave the room for a minute?”

Pop quiz: when you return, your options will be:

a) 25%, 20%, and 18% because they just wanted some private time to talk about how much they liked you

b) 15%, 13%, and 11% because they’ve been negotiating against each other while you were gone

c) Just 18%, because the other two dropped out

d) 30%, but good news!  We’ll all be investing together to help you.

Dan Shapiro [Randy Stewart photo]
Dan Shapiro [Randy Stewart photo]
Don’t let Sharks collude. There’s a reason the federal government outlaws business collusion: it drives the prices in the wrong direction. If the Sharks try any of the “please step out for a moment” shenanigans, just let them know you’re on to their tricks.  Explain that you want one committed partner who doesn’t need to seek the approval of others, and if you walk out the doors you’re not coming back. They only do the “step outside” when they really want a deal, so all the leverage here is in your court.

Of course, the most egregious error here is people who actually volunteer to leave the room. Don’t call your spouse. Don’t call your mentor. Don’t call Steve Wozniak. And for heavens’ sake, don’t go outside to talk to your cofounder who’s standing right there. Do your homework up front, know where everyone’s bottom line is, and trust your cofounder to implement the strategy you discussed without going outside and whinging about it first. Then make the deal, or walk out with your head held high.

Life is Shark Tank

I love this show because it’s the only reality TV I’ve ever seen that feels real. I’ve had friends sell companies for the original offering price. I’ve stared stupidly at an angel investor, finding myself totally thrown by the suggestion that we add a board member. And I’ve knowingly pitched a room full of angel investors, where the actual printed agenda calls for me to walk out and sit quietly in the hallway where they collude on price.

If you haven’t had the pleasure, pull up a comfy chair and watch a few episodes. Just remember when you watch Shark Tank: your role models aren’t the entrepreneurs. They’re the Sharks.

Dan Shapiro is the former CEO of Sparkbuy and Ontela and is now at Google.  His book about startup CEOs is due this year – to find out when it’s released, follow him on Google+ or his blog. He aspires to replace the short-lived Jeff Foxworthy as a special guest on Shark Tank. 

Comments

  • http://twitter.com/nparekh00 Nikesh Parekh

    Great blog post Dan. Every time I watch Shark Tank it reinforces rule #1 of fundraising which is competition drives pricing. If there is only one shark or VC at the table, you are proverbially shark bait. I love the entrepreneurs who try to negotiate when four sharks have exited and there is only one left. If you only have one VC or investor left at the table, better be happy with the terms you get or beat a hasty retreat. Walking away is a reasonable counter to a bad deal.

    • http://www.danshapiro.com/blog Dan Shapiro

      Thanks Nikesh. Quite right – in negotiation geek terms it’s all about your best alternative to negotiating an agreement, your BATNA. If there’s just one shark left and you need the money, it’s not the time to play coy!

  • Forrest Corbett

    Dan, it seems like you’re making a few assumptions which may not be accurate. First, there is a fair amount of content we don’t see. There could very well be a lot more negotiation than what is aired. Watch carefully and you’ll see numbers and details quoted which weren’t previously mentioned – at least not to the viewers. Secondly, the content is not aired in chronological order. Paying attention to things like how much sweat is on a guys shirt or the placement of products on a table, you’ll see a different story is being painted. I’ve even seen the same reaction played twice in the same episode. Also, it’s been clear that at least a few participants did not want a deal, but the advertising that comes from being on the show.

    The show is entertaining, and you’ve got a lot of good points (especially to not leave the room.)

    • disqus_QQae90VZWe

      Cuban said the average negotiation is 1.5 hrs long, with lots of due diligence after the fact. You’re right about it being sensationalized for the sake of an awesome show.

  • http://twitter.com/DarrenGAustin Darren G. Austin

    Really enjoyed this post, Dan. I’ve been completely addicted to Shark Tank for a couple of seasons now and love deconstructing the various pitches to find the lessons for my next pitch. Incidentally, I love your idea of pressing for “one committed partner” as a counter to colluding sharks. Nice way to respectfully turn the table while also demonstrating confidence and politely moving closer to a decision.

  • http://www.facebook.com/jai.jaisimha Jai Jaisimha

    Love this post Dan!!

  • http://www.facebook.com/fred.lebhart Fred Lebhart

    Incredibly well written, enjoyed the post!

  • http://twitter.com/ArcComputer david prokop

    one item not seen is the producer of the show mark burnett get a 7% cut of every company for being on his show. After reading the contract I decided not to audition.

    • http://twitter.com/aroyal Andrew Royal

      unless the contract has changed, it’s 2% of operating profits or 5% equity interest. but it’s a small print buried deep that makes a huge difference and a core reason my startup has never considered pitching on the show.

      • Ryan Dancey

        I heard Cuban on This Week in Startups talking about this and he said they had dropped this term for obvious reasons. Cuban kind of mocked them for trying to get it in the first place.

  • http://twitter.com/valerwright Valerie Wright

    I would add a 4th. Be able to talk confidently and concisely about your business. I cringe at how badly some fumble their way through explaining why customers love their business or can’t answer simple questions about the financials. My advice would be to practice in front of a mirror or record yourself ahead of time until it flows more naturally.

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