Dragons' Den – Musical Mayhem

With perhaps the most gutsy presentation on Dragons’ Den from CBC so far, two friends made an audacious offer, and secured a deal. Interestingly, however, Arlene Dickinson, the marketing maven, did not participate in the deal, despite the fact that her background might be exactly what the entrepreneurs needed.

John Marr and Jonathan Mackenzie of Mackenzie and Marr Guitars came on the show with a handmade guitar that retails for about $1,000. In a daring attempt to prove the quality of the guitar, they had Kevin O’Leary do a blindfold test of their guitar against a $5,000 guitar made by an established brand. When Kevin was informed that he had chosen the $1,000 guitar as the better instrument, he was sold.

The two friends were asking for $35,000 for 35% equity – valuing their business at the price of 100 instruments (of course, costs need to be subtracted, but still, not a large amount). Their plans for the money included moving manufacturing to China, and increase their ability to build more of the instruments.

The catch is that they are selling their guitars solely via their website, which means that potential buyers aren’t going to be able to try out the guitars. Therefore, they will need endorsements in order to encourage potential buyers that it’s worth the risk. Arlene Dickinson, concerned about precisely this issue, declined to invest. Likewise, Robert Herjevec declined for similar reasons.

Jim Treliving, Brett Wilson, and Kevin O’Leary decided to put in a group offer, but not at the terms on the table. Each of the three investors would put in $5,000 for 5% equity in the company. The balance of $20,000 would be given in exchange for a royalty of 5% once the initial investment had been paid off. Until then, the Dragons wanted a 10% royalty.

John and Jonathan felt that 10% was too steep, and wanted to start at 5% from the beginning. The Dragons countered back with 7% from the beginning, with 5% once the investment had been repaid. The offer was accepted, but not before it looked like the two friends would talk themselves out of a deal.

Putting your product to the test on national TV is a big risk, especially when you can’t do a dry-run beforehand. But when it works, the risk can prove to be very rewarding!

Establishing Credit

The owner of a small business posted the following question earlier this week:

My partner and I have established an LLC as an umbrella company for two online retail companies. One of the companies will be drop shipping products from various suppliers. These suppliers require a credit card since we are a startup company. What is the best way to go about acquiring a line of credit without using personal credit cards? Also, my credit score has taken a beating over the past year.

First, the individual posting the question mentioned as an aside a very important point about running a business – you need to keep your business finances isolated from your personal finances. What this means is that not only do you need to keep accurate records for your business, but you also need to keep separate accounts for your business, separate lines of credit, separate loans.

I'd like a no interest loan, since I have no interest in paying it back.

In answer to the question asked, however, it is important to know how credit is given. Credit is issued either because the creditor trusts the person borrowing the money (where the borrower has a good credit rating) or because the creditor can collect from the assets of the borrower (where the borrower has something of value, such as a house, that can be held as a collateral on the loan).

A good credit rating takes some time to establish, especially if there is a negative rating to begin with. Additionally, with a small business that does not have many assets or a strong revenue stream, financial institutions will look at the owners of the company when deciding whether or not to extend credit. Often, financial institutions will require one or more of the  shareholders to personally underwrite any credit extended – which overrides any buffers of liability created by having a corporation in the first place (although there are other reasons to incorporate).

For that reason, as the owner of a small business, it’s important that you be prepared to underwrite the loans your business requires, at least in the early stages. Once your business is established with a history of making profits, the corporation may be able to borrow money on its own. In the meantime, however, you will either require an asset of value to back the loan, or a good enough credit rating on your own to acquire the loan on behalf of the corporation.

Pay the Debt or Save Away

It’s early 2010, about the time that bonuses are paid, and you may be wondering what to do with the extra cash. Hopefully, you weren’t depending on the bonus for your budget, and so you can use it for some of the long-term plans you have.

There are, essentially, three uses you can put the extra cash to:

  1. Splurge it on something – it’s extra, you don’t have a long-term plan for the money, so why not enjoy it.
  2. Save it – the extra $5,000 might help toward a down payment on a house, or pay for your child’s university.
  3. Pay the debt – after all, it costs you to keep that debt around, and if you’re like most people, you don’t like owing other people money.

This pretty much guarantees we'll be left behind.Now, each person’s situation is unique, and there’s no rule for what to do. However, I’d like to address a reason to save when you might be inclined to pay debt which you may not have thought about.

Assume for the moment that you have a $5,000 balance on a line of credit which you pay 5% interest on, and you just received $5,000. The current rates of return on a GIC are about 2%, which means that by paying off your debt today, you’ll essentially save yourself 3% annually on ridding yourself of that debt today.

However, look at your monthly obligations to that line of credit (and this assumes that you are not continuing to borrow against it). On $5,000 of debt, your minimum monthly payment is probably in the area of $150 to $200. This is already in your budget, and you are already setting aside that money each month.

If you pay off your debt today, you will, in theory, free up that money to invest in a long-term plan. However, saving money is generally not treated as an obligation, while paying a debt is. That means that if you remove this debt from your monthly payments, you are not as likely to put the money into an investment.

For that reason, you may want to consider putting a portion of the bonus into an investment today. Sure, it’s going to cost you 3% to do that, but this way, you’ve managed to save that money, which otherwise might have been spent. If, on the other hand, you can convert your monthly payments for the line of credit into a monthly contribution to an investment, thereby ensuring that you do, in fact, contribute the savings each month, then by all means you should get rid of the balance on your line of credit as quickly as possible.

Blogging Guide

Actually, this document is titled “The Income Blogging Guide” and contains a mix of text, audio, and video. It’s free, and was sent to me by Robb Sutton. Considering that Robb generally sends few links, and he gave his recommendation for it, I figured I would give it a look.

BlogTo get your copy, go to the book’s site and enter a name and an e-mail address. Within a few minutes, you’ll have access to 95 pages of instructions, videos, detailed images, and all  the information you need to get your blog up and running.

You can watch a video of Matt Cutts from Google giving a talk at WordCamp 2008 in San Francisco.

Not sure how to set up a website? Click-by-click instructions are included (along with screenshots to help you).

Wanted to know how to find good keywords? What to do with those keywords? The answers are all there.

Best of all, the authors, Andrew Rondeau and Joel Williams, aren’t charging you for this information – because it’s not a trade secret. This is how information about blogging should be distributed – for free, because the answers are all available for free already. In the process, they save you time performing searches of your own, collecting all this information on your own.

So check it out, it can help you get up and running as fast as you can read!

IPO – Initial Public Offering

New York Stock Exchange

New York Stock Exchange

Definition: An IPO, or Initial Public Offering, is the first public sale of stock in a company.

A corporation does not need to be publicly traded, and, in fact, most are not. They are used, primarily, to act as a liability buffer between the people who are doing work and the clients for whom they work. Additionally, they can be used to borrow money from all the same sources that an individual can – but the shareholders’ assets are not held against the loan. There are also many taxation benefits, varying from region to region, to using a corporation.

At some point, however, a company may want to acquire additional capital, often in order to expand their markets and operations, or to launch new products. There are several ways that the companies can raise this capital, for example, borrowing the funds from a bank, or getting a cash infusion from a large investor. The result, however, may be at the cost of debt, or a significant portion of equity and control that the current owners of the corporation may not want to take on.

Usually, when stocks are traded on the market, the funds are exchanged between the two investors involved in the trade. During an IPO, however, money paid for stocks is given to the company issuing the stock. A third party called an underwriting firm may be used to assist in the sale of the stocks, and they will take a percentage of the proceeds of the sale.

For this reason, issuing new shares to sell on the public market can be extremely beneficial to the company, as they can acquire large sums of cash (typically in the millions of dollars for a successful IPO) at a predictable rate. While they may have difficulty in setting the correct price on their shares, as long as they don’t overprice the shares too much, they can often count on a failry large infusion of cash for a controlled amount of equity.

Existing shareholders in the company generally welcome an IPO (and, in fact, many hope for the day the company goes public) as it gives a real value to their holdings. For example, if the three founders of the company owns 1 million shares each in the company, when the company goes public, issuing an additional 1 million shares, while they are [usually] not allowed to sell their shares for a certain amount of time after the IPO, they now know how much their shares are worth in real dollars.

Which brings up another point. There are a lot of regulations surrounding these public offerings, and who can trade what, and when. There are, at the time of the offering, few statistics about the company making the offer, meaning that investing in such a company can be extremely risky. Not only that, but the company is not allowed to make certain types of releases around the time of the offering in terms of research.

While an IPO can quickly bring in large amounts of investment at a relatively low cost, as well as provide initial shareholders with a return on their holdings, they are, in most cases, extremely risky for the new investors.

Thanks to @momoesque for the topic suggestion.

Surprising Connections

What is the most interesting connection made through your network that resulted in a contract or a sale? We all know the benefits of networking, but I was wondering just how remote a connection other people have found to have landed them a job. I’ll start by giving two personal stories.

My Current Job

When I graduated university, I didn’t have a job, and spent several months teaching part-time at a community high school. During that time, I got engaged, and at the engagement party, the father of my wife’s close friend heard I had a degree in computer science. He gave me his e-mail address, and suggested I send him my resume. I e-mailed it that night.

Three weeks later, I was called for an interview, and then a week later, for a second interview a few weeks after that. Two days before the wedding (it was only a 4-month engagement) I was informed that I got the job, and would be starting a month after the wedding.

Landing a Contract

The second story happened more recently. I did some work for a client for about 15 months building a fully customized inventory management system. I was at an engagement party for a friend, and another guest was chatting with the groom, and asking him about what he did. He mentioned that he worked for my client, and in an off-hand way, said “Elie would know, he wrote our software!” The guest turned to me and asked me what I did, which I quickly explained. A month later, I was hired to build a catalog of 200K files for a community organization he represented.

What’s the most interesting connection you’ve been involved with?

Dragons' Den Season 5 – Tools of the Trade

Kelvin.23 from Kevin Royes

Kelvin.23 - a great multi-tool

Wednesday night was the first episode of Season 5 of Dragons’ Den on CBC, and it was fantastic. Also called the Celebrity Episode, 3 well-known TV celebrities were on hand to endorse great business ideas.

For fashion, there was Jeanne Beker from fashion television. Mike Holmes was there to check out the tools (and inform one Den hopeful that she better make sure her liability insurance is paid up). Debbie Travis, a well known expert in home decorating, was there to check out the Kelvin.23, the subject of this post.

Kevin Royes from Vancouver invented the Swiss Army Knife of home decorating, and everyone on the show loved it. Called the Kelvin.23, it features a variety of tools that will let you do most light to medium jobs around the house:

With 23 essential features integrated into this one compact design, kelvin.23 is ideal for anybody in need of a quick fix. It hammers, screws, measures, levels and even shines a bright light when you need it most. Made from cast aluminum, zinc, carbon steel and ABS plastic…kelvin.23 is built to last.

The deal Kevin was asking for was $200,000 for 10% – and he had $250,000 in sales during the preceding 6 months prior to the filming of the show to back up his $2 million valuation.

The first Dragon to decline was Kevin O’Leary on account of the initial description of what the money was to be spent on – manufacturing. There’s risk in manufacturing that Kevin O’Leary felt was not intrinsic to the business. While further questioning of Kevin Royes revealed that he intended not to set up a factory, but to directly negotiate the manufacturing process, Kevin O’Leary remained out.

Jim Treliving, however, saw a bargain at $200,000 for a solid business, and offered his money. When Arlene Dickinson asked to go in on the deal, Jim balked, and so Arlene made the same offer on her own. Robert Herjevac offered to match Jim’s offer in conjunction with Jim (that is, combined at $400,000) for 25% of the company, and Arlene joined the partnered bid.

With three of the Dragons vying for a piece of his company, Kevin Royes stepped out for a quick consultation with his wife and his marketer for the U.K. On his return, he countered with an offer for $500,000 for 25%, which, after some brief discussion, was accepted by all three.

This was someone who played his cards well. Kevin had a solid business, impressed Debbie Travis, who would then feature the product on her show and record an infomercial as part of the deal. He had sales to back up his valuation, putting him in a strong bargaining position.

But most of all, he impressed the Dragons as soon as he did his demo. At that point, they were interested in investing, and he could stick to his valuation, and they would pay for it.

Founders Agreements

I was reading a question on Answers OnStartup from someone who was not happy with his founders agreement, and wanted to know his options for renegotiating. The agreement made was as follows:

I early on pushed for getting an operating contract agreed to by all three because I intuitively believed “make things explicit” would prevent heart-ache in the long run. My one big mistake was not doing due diligence, that I’ve now done, on how things should be done for a startup. The agreement that we are currently under is each founder gets a third, but we log our hours and get paid an hourly wage (significantly less than my contract rate but significantly more than A’s salary rate) which will be paid when when the company starts making money. The wage was a concession to me because I knew I’d have a lot of up front labor (but its now not seeming worth the risk its supposed to offset).

Partnership Agreements

The meeting of partners

The issue with this arrangement is simple – there’s no vesting, and the contributions being made by each of the three founders is not going to be equal in terms of time (although the value of the contributions may be equal in other ways).

First, what’s vesting?

Vesting in terms of a startup is the granting of partial ownership in the company (that is, shares in the company) that the employee gets over time. What this does is ensure that the employee will do their work (or they will be forced to sell the unearned component of their shares), while guaranteeing to the employee that they will, in fact, get their shares if they do the work required.

This is important in a startup in which the various people involved will have different levels of contribution, at least in the early stages. However, an assumption is made that the idea, IP, or company is initially owned by a single person (or company) which is recruiting others. In order for the initial founder to guarantee his investment in other people, he can vest their portion of the company.

In the case of the question above, however, the company was founded with three people, each with an equal share. Vesting was not actually an option, since no one owned the company beforehand (that is, who is the current owner of the company if not all three founders). Therefor, what this person needs is not a vesting schedule, but a solid founders agreement.

A founders agreement can be as simple as a single sheet of paper called a Statement of Understanding. The first lines of the paper would be something along the lines of:

This document is informal, and is intended to be the basis for a formal Memorandum of Understanding between the parties named below. It is meant to be interpreted as plain English as understood by a reasonable person. It is not a contract, but is intended to define the parameters under which a company may be formed.

The rest of the document outlines who the various people or companies are subject to this statement, what each one will be contributing to the partnership, and what each will get in return. Over time, this document can be expanded to include things like payout options, buyout options, dividends, reinvesting profits, and so on.

Regardless, it is critically important that any partnership have such a statement at a minimum, in order to prevent misunderstanding later. It should be easy to understand – it’s not about creating a complicated legal document that covers all contingencies. It’s to make sure that each of the partners understands what is expected of them and what they will stand to gain from the arrangement.

If you are looking to get into a partnership with someone, whether you are initiating the arrangement, or the other person is, make sure that you have such an agreement, and that any concerns you might have are outlined in it.