Review of Dragons' Den Episode 8

I finished watching last night’s episode of Dragons’ Den a few minutes ago. If you haven’t yet seen it, watch is now on the CBC website, then come back here for the review.

There was, much to my surprise, only one deal last night, although there were a couple of offers. The lucky entrepreneurs were Wendy Johannson and Claudia Harvey from Dig It Handwear who were fortunate to have two dragons competing against one another for a stake in their company. The two offers were as follows:

Jim Treliving offered the $50,000 investment in exchange for 25% of the company, changing the total valuation from $500,000 to $200,000.

Kevin O’Leary, on the other hand, also offered $50,000. His initial offer was to act as a line of credit for the company, and take a 10% royalty. He adjusted his offer a moment later for 10% equity (staying with the $500,000 valuation), plus a 3% royalty on the product demonstrated.

Before we discuss the choice Wendy and Claudia made, look for a moment at the theoretical cost. With Jim’s offer, they would be giving up a large portion of their company, including any future products they might create. Since the cash offer was the same, they could not ensure that they would get a future investment for a new product, and they have 3 other products in various stages of development. However, they would be giving up the same percentage of any sales on their additional products.

Kevin, on the other hand, is taking a smaller stake in their future in exchange for a fixed royalty on sales. This provides Wendy and Claudia the possibility of future investment when they launch additional products. However, the royalty is paid first, before the expenses, which means that 3% is likely to cost them even more, since it will have to be paid from the profit. Additionally, since they are paying the 3% as a royalty, they have no assurances that Kevin will stay around to help them, despite the fact that he’s being paid a royalty.

However, it was clear that Wendy and Claudia valued equity in their company quite high, to the tune of $500,000, and were not open to compromising on that. They called their business adviser who agreed with them, and decided to go with Kevin’s offer. The deal was sealed.