HM Insights

Legal Eagles & the Dragons Den – Beware of the known unknowns

Welcome to our weekly Dragons Den blog where a member of Harper Macleod's entrepreneurial team will share their view of the latest episode, give some hints and tips and also explain how we could have helped … and hopefully have a bit of fun along the way. Following Anisha Kaura's blog on Brand protection benefits are patently obvious, this week's blog is by Louise Torr, an Associate in our entrepreneurial team who specialises in advising start ups and high growth companies. She's part of a team that has completed more than 90 equity deals in the last three years.

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This week's Dragon's Den episode saw the return of Theo Paphitis to the Den, which brought some healthy competition among the Dragons when making offers of investment to a couple of the businesses in this weeks' episode.

It's not always what you know, but who you are ...

The first business into the Den was The Fine Diet Limited. Established by one of the co-founders of 'The Body Coach' this business had created a subscription-based app for customers looking to follow a tailored diet.

At first, the Dragons showed scepticism around the USP of this app, and that £500,000 had been spent on marketing to date, however, they quickly tuned in when it transpired that Benjamin had co-founded the very successful 'The Body Coach'. The company then received an offer of investment from both Sarah and Theo which was purely based on Benjamin's track record, highlighting once again that investors are often drawn more to the individual than the business idea itself.

Musical copyright – a classic case of copyright

The pitch for Bespoke Classical Music, which was only briefly covered on the show and didn’t result in an offer of investment being made, still raised an important point for 'creative' businesses to consider. Bespoke Classical Music produces personalised pieces of music for clients for special occasions – but how would the copyright be dealt with in this type of business?

When an artist creates a piece of music, the copyright belongs to the artist, or in this scenario presumably the company if the artist is an employee of the company and agreements were in place. If the customer was co-creating the music, then would this copyright be jointly owned? Or would the company assign any copyright ownership to the customer in order to give the customer the full rights attaching to the copyright?

Although this wasn’t covered in the Den, it is certainly an area of consideration for this business or any other like it and it is important to ensure that it is covered off in any terms and conditions that such a business puts in place with customers.

Share structure can cause a chain reaction

Another business 'pedalling' its wares in the Den this week was 'Re-Hook', which had created a cycling tool that allows cyclists to reattach their chain to the chainring when it comes off, to avoid getting oil-stained hands.

At first, some of the Dragons were reluctant to pursue this opportunity as they didn’t see the need for the tool in the market, however, once the revenue figures from the last two years were presented to them, they had different ideas.

This pitch resulted in every single Dragon putting an offer on the table, with Sarah Davies had suggested a deal structure which would result in her reducing her share capital in the company in 12 months time once certain targets had been met.

It is always worth obtaining advice on how different deal structures will work and the costs involved in doing this. Inevitably it would be the company which would have been paying for any buy-back deal structure as opposed to the investor, and it is doubtful that the investor would have accepted any reduced rights for a reduced shareholding. Make sure the deal is right for your business and that the investor is the right fit. Failure to consider this could be catastrophic for the company and a good lawyer is there to guide you on this.

The dog can't eat your homework

The dog food market is booming but Michelle had a struggle from the outset to convince the Dragons that her business, The Barking Bakery, was different from other competitors out there, particularly since Deborah had previously been involved in a dog food business.

It became clear quite quickly that numbers were not her strong point, and as it transpired she had in fact completely undervalued her business based on turnover to date. The Dragons were left feeling that there were too many holes in the figures presented to them and could not trust this information to make an investment-based decision.

It cannot be stressed enough how important it is to know everything there is to know about your business before pitching to an investor, and ensuring that you have had strong accountancy input with the numbers and business plan. Michelle also had not fully considered her competitors in the market, which is a fundamental element of any business plan.

Get in touch

Please get in touch if any of the issues discussed above are things that you might need to take advice on.

Click here to view Louise Torr's views on episode 5.

INTELLECTUAL PROPERTY

BUSINESS  LAW & CONTRACTS

CROWDFUNDING

CORPORATE LAW

ENTREPRENEURS, GROWTH & INVESTMENT 

CATCH UP - DRAGONS DEN EP 4 SERIES 17