Dragons Den Deals

EIREHotspur

Forgive my ignorance people but lets say Theo does a Deal for 40% of someones business, how exactly does that work for him to get his money back.

Does he own
40% of profits and 40% of that business if it is sold
or
40% of profits and his stake in the company if it is sold?

He obviously can only advise and doesn't have the final say in decisions of the business.

Darragh29

Say he invests 100K for 40% of the business. In 5 years time if the business is worth 4,000,000, he will be looking for 40% of the valuation of the business at that time, which is 1,600,000 Euro, or a return on his investment of 1,500,000.

If the business fails, he gets zilch.

DubTony

He owns 40% of everything and has a 40% say in how it's run. Which, if you're Theo Paphitis, probably means you effectively run the company.

Axwell

Darragh29 wrote: »

Say he invests 100K for 40% of the business. In 5 years time if the business is worth 4,000,000, he will be looking for 40% of the valuation of the business at that time, which is 1,600,000 Euro, or a return on his investment of 1,500,000.

If the business fails, he gets zilch.

Return on his investment of 1,500,000??? what? In your example he invested 100k for 40%..where does 1,500,000 come from? His 40% share would be 1.6m as you said.

spartacus93

axwell wrote:

Return on his investment of 1,500,000??? what? In your example he invested 100k for 40%..where does 1,500,000 come from? His 40% share would be 1.6m as you said.

If the business is worth 4million, he owns 40% (1.6 million). Therefore if he sells his share for this amount his return on investment is 1,500,000, the sale value - his initial investment of 100k. He will get the 1.6 million but the profit on his investment is only 1.5

Kinetic^

What he's buying is share capital, which is essentially the business. That's the actual business transaction that's happening behind the scenes.

dbran

I would imaging he is buying share capital.

But I would suspect he also wants to be sure that;

1) He has an exit strategy that he can get his money out after the due amount of time (say 5 years) has elapsed, get paid a premium on his investment and to force the issue if he does not get paid.

2) To have some vote in the running of the company to help to accomplish 1) above.

Remember with a private company there is no natural market for the shares so 40% could be that sames a 0% as you can always be outvoted and you cant sell them to the public or anyone else without permission.

So I suspect that the dragon takes up a different type of share say "B" ordinary Shares. The holder of a "B"share has all the rights of an ordinary share holder except that after a due amount of time his shares are redeemed at a premium which is the value of the business. And if this does not happen each B share counts as say 10, giving them control of the company and rhe ability to force the redemption of his shares.

Thats how I think it would work anyway

DB

fergalfrog

I asked the same question on another thread - especially as to how you guage who is putting in the work and the way a salary might get paid to the owner.

However since then I have got a more definitive answer from an accountant:

When there is an equity split the investing equity take a board set (i.e. a directorship). They are then in part control of the company. So lets say I come to you with the idea and offer you a 20% stake in the company for the expertise you are providing and the ongoing support you will provide then you will also become a director of the company. If I try to pay myself an absurd salary to reduce profits and in turn the value of your share in the company, you as the other director would be able to stop me. Salary increases by directors require the agreement of the board.

There would have to be a legal agreement drawn up etc to allow the project to proceed. In a lot of cases you have the founder of the company not getting paid until the idea has actually turned a profit. However, the founder share would have more value than an ordinary share.

Essentially, you would get your money when the company is being sold or wound up. You could request (once profitable) that dividends be paid out – which I think would be advisable in case the company flopped after a year or two.

There would be no profit split on an annual basis as such. Again, depending on the way matters go you might be able to take a salary out of the company too.

The dragons make their money by inputting their expertise to increase the value of the project and therefore the company getting the company to a stage where it can either be sold or their share bought out by the founder."


I asked this in relation to a new site I set up:
http://www.norecessionroundhere.com


...which is a bit like the Dragons Den.


Hope this helps.

antoinolachtnai

New companies generally do not pay dividends to shareholders. There is generally no question of getting dividends at an early stage. If people are working on the company full time it would be usual for them to draw a salary.

Just because a company is profitable does not mean it has any cash to distribute to shareholders.