Negotiating — Substituting Money
We hear stories about people “thinking outside the box” when structuring a deal. When negotiating using one medium (i.e. Money) it feels very zero-sum — when I get more, you get less. However, some really great deals occurred when a party decided to bare more risk.
Mark Cuban — Shark Tank
In this clip, we’ll see Mark Cuban trying to buy a stake in SworkIt. Ben and Greg, the founders, entered seeking $1.5 million for 8.5% ($17.6M valuation) of the company. Last year, they made $775K, one-third of that from advertising and two-thirds from subscriptions.
In the last three months, they did $90K in sales. The company raised $2.5 million in VC money. They’re launching premium content with equipment soon, too. 2.9% of users convert to the premium service, but the free app is still profitable — even though they have excess ad inventory space. They stated that 72% of ad space was sold, leaving 28% unsold.
Mr. Wonderful thought they are very credible in their space. He offers them $1.5 million in debt at 7.5% for two years with 2.75% of the company as a kicker.
Mark offers $1.5 million for 10% ($15M valuation) and he gets $1.5 million of worth of unsold ad inventory; he says it’s a win/win.
By Mark structuring the deal with a mix of cash and “credits” which are still helping the SworkIt brand, it was a no brainer why the founders went with him.
Movie Deals
Jack Nicholson
Jack Nicholson accepted the role of the Joker in 1989’s “Batman” for $6 million instead of his then-average salary of $10 million. Part of the deal was that Nicholson would earn a percentage of the film’s total earnings, including merchandise sales. The film did $409M in 1989 ($781M in today’s money).
Due to its massive box-office took home around $60 million. It is still the single-movie record for actor’s salary.
Facebook — Equity vs. Cash
David Choe
David Choe, a graffiti artist chose Facebook stock instead of cash when he spray-painted the first Facebook offices in 2005.
Choe said Facebook originally offered him $60,000 to paint murals in the company’s Palo Alto offices in 2005. Today, he said, the stock he took instead could be worth more than $500 million.
When Choe was interviewed on the Howard Stern Show he said, “I believed in Sean [Parker]. I didn’t care about Face-… I’m like this kid, like, knows something and I’m going to bet my money on him.”
Winklevoss Twins
Cameron and Tyler Winklevoss had a decision to ruled in their favor and settled with Facebook Inc and its founder Mark Zuckerberg, for $65M. The suit was over whether or not Mark stole the code and idea from them for Facebook. As a matter of principle, they would take a cash settlement, as to not have anything invested in a stolen idea. This settlement took place in mid 2011. Facebook went public a year later, valuing it (at that time) at $104B.
Since then, it has been up 180% and is valued at $310B.
A cash deal isn’t creative. The value of cash is very objective. Creativity is a value creation tool. When you structure a deal on “new grounds” using “new mediums” you will find an area when other might not find certain mediums as valuable as you do. That would be the amazing leverage to have to come out the winner.
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