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Legal Eagles & the Dragons Den – Keep it simple to catch a dragon

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 Louise Torr's blog on War and Pieces in the boardroom, this week's blog is by Natalie Wallace, a solicitor 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.

Legal Eagles & the Dragons Den Ep 6 –  Keep it simple to catch a dragon

Things in the Den had a shake up last night with legendary Dragon Theo Paphitis making a guest appearance due to Touker Suleyman being under the weather. The remaining four feisty regulars were back again to grill each of the businesses.

Sleep app chap caught napping

Let's start from the beginning this week. First in the den was Snoozle, an app that encourages users to stay off their phone for eight hours a night and earn points for every hour they are off their phone and asleep which can then be used with other commercial businesses.

Theo was straight into the numbers and proof of concept, or unfortunately lack of proof of concept in this case. The business had not proven that anyone was willing to pay the £3 charge for it. They also did not have evidence that 1% of the market would want to use the app.

In order to get investors on board with your business, you have to show that your idea works and not just because you think it will, but because you have proof that it does. Proof of concept in this business would have been easy to acquire but the entrepreneur had not done it. It is often the case that entrepreneurs can get pulled in to the more complicated areas of your business and forget the simple things, which turn out to be your downfall when it comes to investment.

Deborah echoed this when she probed on the target market, the millennial generation. The business explained that the rewards would entice users in, for example, cheaper life insurance. Again, this showed the business had not done its market research - millennials are not excited about cheaper life insurance. It is essential that a business appeals to the right market in order to be successful.

It was not all doom and gloom though for Phil Neil of Snoozle, as all the Dragons agreed he was a great entrepreneur but the business was not what they were looking for. As Louise discussed last week, often investors can be drawn to the individual rather than the business.

How to bag an investor

The sustainability market, specifically in relation to reusable plastics, is booming right now. Enter FestivalBag into the den. Now, this product was something I could relate to on a personal level. The Dragons were confused initially about the simple concept, with Deborah Meaden having to take the pitcher step-by-step through the business idea. When pitching to investors keep things simple, try not to go off on a tangent, stick to your script or answer the question being asked and not what you want them to know. The business was applauded for its concept as all the Dragons related to the issue.

Impact investing is on the rise just now, and a business such as this which focusses on the key issues of sustainability would have been perfect for an impact investor. Investors now have a social conscience and want to support businesses hoping to achieve social or environmental impact. The Dragons all wanted to support the idea however the pricing point was not right which was the downfall for FestivalBag.

Plug your business, but don't give away too much

The final business in the den would have been pleased Touker wasn't feeling 100%, with entrepreneur Richard Brooke obtaining joint investment from Theo and Deborah for his product 'Sockitz' – a simple device which allowed you to use a socket safely while a house is being refurbished or decorated. The Yorkshire businessman secured £50,000 each from the two Dragons for a 25% shareholding each with a buyback scheme in place whereby their shareholding would be reduced to 20% once they had their initial investment out the business. There is so much we could discuss about this business -from the patent, to his self-admitted lack of salesmanship to the buyback scheme - so let's pick the last two.

Richard's nerves were clear when Peter Jones had to help him with showing off his product, but this made him even more likeable as he was clearly just a normal guy with a great idea. We hear all the time from our friends at Scottish EDGE that you do not have to be a brilliant pitcher to obtain investment. You are not being judged on how well you can pitch but rather the viability of the product. Richard knew his product, his figures and his market inside out, making it a no brainer for the two Dragons. Deborah again highlighted the conscience investor by asking about the type of plastic, and you could tell she was pleased to hear that it was recyclable.

Now on to the share buyback. First, when I heard that the dragons wanted 50% of the business rather than the 30% being offered I thought uh oh, that's a lot to give away on the first round of investment. That being said, with the buyback being introduced it meant that providing the dragons got their original investment back, which Richard thought would be within the next two years, their share capital would be reduced allowing Richard's share capital to increase up to 60% and the dragons being left with 40%.

There are various structures of deals that companies can put in place to make the deal right for both them and the investor. You should always take time to consider each of these options before making any rash decision as failing to consider your options could result in you losing control of your company. If a business allows an investor to have too large a shareholding at the outset, this can prove difficult for future investment. You need to ensure you retain enough shareholding in your business to motivate you to continue to work in the business. We all know life as an entrepreneur can be extremely difficult, with long hours and often little reward at the start, so don't put yourself on the back foot too early on!

Get in touch

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

And tune in next week for our views on episode 7.