How to Ask for the Right Amount

(Or, “Stop the Madness!”)

Want to get laughed off/thrown off the set of Shark Tank  before you even demonstrate your product? Just ask for an unrealistically high investment amount for your idea or business.

On the show, dollar amounts and equity stakes are supposed to be calculated based on the company’s valuation (how much it would be worth if put up for sale). Here’s an important note on that: All that investors care about (usually) is a company’s value today. Not its potential value. Not its “pre-liquidation event” value some years in the future.  Today.

So when business owners and inventors say, “but you don’t understand, this idea is worth millions!” it really irritates investors. It makes them think that you think they’re dumb. Then they give their money to somebody else. So don’t let that happen.

Here’s how you figure out a plausible valuation — and avoid looking either incredibly arrogant or unbelievably stupid on Shark Tank or in similar venues. At the start of each pitch on the show, they flash a bunch of dollar figures and percentages on the screen. Here’s what that stuff means.

The pitch-valuation formula:

cash amount being asked for / Equity stake offered (%) = valuation (current cash value of business or asset)

Here’s an example with actual numbers:

“Hello, Sharks. My name is Darius Doofledorfer, inventor of the Doof-Proof tactile gluteus stimulation system. I’m here asking for $200,000 in exchange for a 10% stake in my company, DoofProof LLC.

$200,000 investment / Equity Stake (10%, or .10) = $2 million

So if this were a real pitch on Shark Tank, our friend Darius would likely be met with incredulous comments such as, “So, you want us to buy into the $2 million butt scratcher?!” For that amount of money, any Shark still insane enough to invest would want a much higher ownership stake — like 60% — to compensate for his or her assumed risk.

Doing so would also have the effect of lowering the presumed value of the company:

$200,000 / 60% = $333,333 (what the company would be more “realistically” valued at)

It’s surprising the show’s producers don’t vet contestants’ numbers more carefully. As tough as it is to get on the program, you’d think they’d screen for something so basic. Then again, seeing people so inventively insulted by Mr. Wonderful does make for great television.

Akweli Parker is the founder of Digital Delta Media LLC, a content marketing services firm. Follow him on Twitter at  @aparkerddm