Dodgy Dragons
They aren't called Dragons for nothing! James Caan's investment practice in the den exposed
When Sharon Wright, wanted to increase the profitability of her fledgling business Talpa Products, which produced the award-winning Magnamole product, she did what many entrepreneurs dream of and walked up the famous steps in TV’s Dragons’ Den and walked back down again with a deal done and with the two dragons that she had wanted, for more money than she had asked for. Sounds perfect doesn’t it? However without the cameras, the deal became anything but perfect.
We talk to Wright about what went wrong and why the perfect deal turned so sour.
“One of the best pitches that the Dragons’ had seen” was how Theo Paphitis described 40-year-old Wright’s performance.
The media dubbed her ‘the dragon slayer’. As Sharon Wright, a single mother from Scunthorpe, walked away from the ‘lair’ with more money that she had asked for, it really was a coup.
Never in its five previous series had there been such a confident performance on the TV show for entrepreneurs. Even the most famous, and successful, investment pitch from Levi Roots and his Reggae Reggae Sauce was not as slick and self-assured as Wright.
The five panellists, Duncan Bannatyne, Peter Jones, Deborah Meaden and James Caan echoed Paphitis’ words to say her pitch was brilliant and it looked as though the £80,000 investment she had gained, £30,000 more than she had actually asked for, would propel Talpa Products, her fledgling business, into the commercial big time.
Praise all round: All five dragon’s praised Sharon on her business & pitch
Her business and the MagnaMole device came about as, after moving home, Wright watched in surprise as an engineer poked a cable through the double-skin wall using nothing more sophisticated than a metal coathanger, apparently with no idea of what lay in between. It was, she says, her ‘Eureka moment’. ‘I thought, “That’s not safe – you don’t know what’s inside that cavity”.
There could have been a mains cable inside the wall. I decided then and there that there must be a better way. And there was.’ For the next two years, Sharon worked 16-hour days developing the impressively simple MagnaMole device, which simplistically, is a plastic rod that can take a cable through cavity walls without risk of electrocution and speed up the entire installation process.
Wright was flattered that in 2008 the MagnaMole won the Diamond Award for Innovation at the British Invention Show and by 2009 she had sold 41,000 in the UK.
With her company by then valued at £350,000 and having an annual turnover of £70,000 a year she intended to spend additional investment on staff, on a new website and on printing foreign language instructions to insert in global versions of the MagnaMole.
At that point, she was surviving, as most start-ups do with one employee who worked just one day a week for the minimum wage, the additional staff that the funding would provide, one full-time to look after the day-to-day operations and another part-time to assist her with some of the admin, which mounted up whilst she was out of the office meeting potential customers.
So in February 2009 she applied to Dragons’ Den and was told she would be considered for an appearance. ‘I was really excited,’ she says.
Wright then did her homework, and following investments in the ‘ChockBox’ and the rapstrap, both of which were in a similar market to her product, the two entrepreneurial dragons that she wanted to secure were Duncan Bannatyne & James Caan.
During her pitch, Sharon asked for £50,000 in return for a 15 per cent share in her company. All five Dragons - Deborah Meaden, Theo Paphitis, Peter Jones and most important to her Cann and Bannatyne were impressed.
Wright was then put in the unexpected position of choosing between them, but Bannatyne & Caan had actually offered her £80,000 for a 22.5 per cent share of her company as they felt that she hadn’t asked for enough of a capital injection to reach the targets that she had outlined in her pitch. Given that these were the two Dragon’s she wanted, she accepted and felt like she was walking on air.
The start of the problems
A few weeks after the filming, Sharon was invited to meet the man she so admired at his London Mayfair offices.
Having made the 200-mile journey from Scunthorpe, for the pre-arranged meeting, she was told that Caan was busy. Instead, she was escorted to a local coffee shop to meet Peter Moule from the firm Electro Expo, who’s company was behind the ChockBox, and had sold a stake in his company to Caan and Bannatyne in 2000. It would be money from Electro Expo that would support her fledgling business, she learned.
Happier Times: Duncan Bannatyne & James Caan with Peter Moule
A few days later, she met Bannatyne at his offices in Darlington. This time, the Dragon had a more personal touch and introduced her to his staff, spent time with her and gave her the advice and support she was craving to grow her business.
In June, Wright received two ‘pre-contracts’ from the Dragons pledging £40,000 each. Business Matters has seen sight of Bannatyne’s contract (copy here), which is clearly in line with those discussions seeing him personally purchasing 12.5% equity for £40,000, we have not seen any similar stage documentation from Caan.
Wright then met both Caan & Bannatyne to do a photoshoot and agree and sign the final contract to tie up the investment. Both Cann & Bannatyne had contracts drawn up, but in line with standard investing protocol, all three needed to agree one standard contract, and after private discussions it is understood that Bannatyne gave in to Caan’s requests to use his ‘standard contract’ although given it’s length he did not have time to review it in any detail, but having invested together on a few deals by that point, took it to be a reflection of their agreements to date and discussions regarding Wright’s company.
The Photoshoot: The day she signed the contracts
Afterwards, when the Dragons told her they needed the contract signed, she felt she had to agree, even though she had no legal representation. ‘I was desperate for the money,’ she says. ‘When they were going through the contracts, it was all going over my head.’
Bannatyne said, that as he had only just seen the contract, he was making some assumptions regarding some of its content, but was happy to take Caan’s judgement on it, but very clearly asked Wright whether she needed a lawyer, but she foolishly chose to press ahead. ‘I thought I didn’t need to be suspicious of my business partners,’ Wright says, which in hindsight is something that she regrets and is also a lesson for anyone gaining investment in their business whether it is from a family member, friend, or famous dragon.
Wright said that at that meeting she clearly remembers saying to Caan, “Well, you’re not going to rip me off are you, because you’ve got a lot more money than me.” And I signed the contract.
It was then that she was informed, by one of James Caan’s senior management team that the £80,000 investment was, in fact, a loan that she would have to pay back. At that point, Sharon considered pulling out of the deal, but not wishing to alarm her existing investors she decided to continue.
However Bannatyne comments that ‘it may have actually been more beneficial for Sharon if some of the investment had been regarded as a directors loan as her company owed her £150,000 that she had loaned it to get started and if it had have been capitalised the resulting dividends would have been taxed, this would not have applied to James Caan as he doesn’t pay UK tax, but it would not necessarily have been in the same terms as outlined in the agreement.’
She had kept both dragon’s up-to-date with progress on her business and Bannatyne, she said, always responded, no matter where in the world he was always replied by phone, text or email and considering how many business and charity commitments he made me feel i was important’ Wright adds.
It was only when things were going drastically wrong that alarm bells started ringing.’ The Dragons’ Den show was broadcast on July 22 and business boomed with the publicity.
Wright tells me that she was told by the BBC that their website had a record number of hits from people watching the re-run and she found herself answering 7,000 emails. Soon afterwards, she had a meeting with Caan on his own where he suggested she redesign her website using one of his contacts.
‘I finally thought I was getting the support I needed,’ she says, assuming his company would foot the bill. Instead she got an invoice from an expensive company for a sum well outside her budget, which Caan would have known and there was still no sign of the money.
She had employed more staff to cope with the extra business, yet she was unable to pay their wages. Nor could she pay her suppliers, and two of them stopped production.
Finally, in late August, the Dragons’ released a mere £4,000 from Electro Expo to help her pay costs. Over the following months she borrowed a further £22,500, making a total loan of £26,500.
Wright had also decided to not cause friction between Caan & Bannatyne and so as it was Caan’s team that had been discussing the financial arrangements of the deal she assumed that Bannatyne had full knowledge to them and was in agreement with them.
It was around this time that Sharon employed a solicitor to examine the contract drawn up by Caan’s lawyers and finally realised the enormity of her mistake. In order to obtain their 22.5 per cent stake in the company, the Dragons bought a number of shares for a nominal fee of £1 per share.
In effect, they had bought nearly a quarter of Sharon’s company for £29 with the promise of loaning Talpa up to £80,000. There would be no additional money by way of investment and there was limited access to the interest-free loan which could be reduced at any point to whatever value the Dragons chose.
Also, the contract stipulated that the £80,000 loan had to be paid back ‘as soon as the cash-flow of the company permits’. Sharon was particularly disturbed to learn that, in signing the contract, she had agreed that the two Dragons could charge a fee for their support.
She claims that in a meeting that took place in August 2009, she was told that she would by a member of Caan’s team that her company would have to pay an estimated £3,000 a month fee to them for their ‘services’, including the use of a PR company recommended by Caan.
At the same meeting, she claims she was asked to reduce her salary from £50,000 to just £12,000. Indeed, it appeared she no longer had control of her own company.
Sharon’s solicitor, Dean Dunham, pointed out that one of the Dragons would be chairman of the company and would have the casting vote in all decisions, which given the size of their investment is not normal.
It was then that Dunham set up about reversing the deal based upon ‘the worst contract that he had ever seen’ and when the full details came to light Bannatyne was said to be livid and contacted Caan and his senior management team to tell them that this was not how the deal should have been structured.
Banntyne is also said to be furious that there was to be the £3,000 fee levied on the fledgling business and that the investment had not been as it should have been with them, either directly, or indirectly through Electro Expo converting their £80,000 into equity.
This investment and equity stake would have been realized, when, and in the normal case of events, been realized by either a full-sale, or part-sale of the business at a mutually agreed date.
Bannatyne was keen to invest in Sharon alone and at the previously agreed, and never changed as far as he was concerned, terms. Where he paid £80,000 in return for 22.5% equity in her company, with no loans or service changes payable. Wright decided that at that time she couldn’t trust anyone and so declined the offer, a decision that she now regrets as she accepts that Bannatyne was the good guy.
With Bannatyne & Caan, now out of her business, Wright was having to cope personally with problems that all of the stress that the situation had put her through. She had lost interest in
confidence as a person. I didn’t know who I was or what I was going to do, and it scared me.’
This, and the fact that her company has paid back £22,000 of the £26,500 loan, might have been the end of a difficult story.
Yet, according to Sharon, it was not. She says she has received numerous calls, texts and emails from Caan and his team, since the day she was discharged.
They have said to me, “Tell the story in a positive way and we’ll support you, help you promote it.” I’ve not responded.’ Nor is it the end for the Magna–Mole. Though hampered by the partial loss of her supply chain due to the removal of credit as a direct result in cash-flow issues brought about waiting for the promised £80,000, Sharon’s business has begun a recovery and is now in profit.
She has secured contracts with B&Q and Maplins, as well as the department store Kmart, with hopefully Sears to follow in the US. Sharon has also secured a deal with a new investor giving him ten per cent of her shares for £100,000.
Taken from the business matters website dated 23rd September 2010 http://www.bmmagazine.co.uk/They-are-not-called-Dragons-for-nothing-Sharp-practice-in-the-den-exposed.958
