> Release of Unknown Claims. I acknowledge that there is a possibility that after my execution of this
Agreement, I may discover facts or incur or suffer claims which were unknown or unsuspected at the time this
Agreement was executed and which, if known by me at that time, may have materially affected my decision to execute
> I have been advised
of the existence of Section 1542 of the California Civil Code which provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR
SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE
> I and the Releasing Parties knowingly and voluntarily waive the provisions of Section
1542, as well as any other statute, law or rule of similar effect, and acknowledge and agree that this waiver is an
essential and material term of this Agreement...
What the actual fuck. Can a contract lawyer chime in on whether this term is enforceable? Can a release release the very laws that regulate releases? In California?
IMHO lawsuits are like an exception handler--they're what you do when the normal way of doing business fails. There are people who use exceptions as part of handling normal conditions and there are people who use lawsuits as a normative way of doing business, and I try very hard to work with neither with about the same level of distaste. Documents like this make it pretty clear what side of the line they're on, as this clause only comes about with an army of lawyers with nothing better to do.
The big advantage of an arbitration clause is that the outcome of a contract dispute is much more predictable and financially bounded in magnitude. The rule of law is working when people don't need to go to court to know how things will turn out. That is, the interpretation of the law shouldn't depend on the moods of the lawyer or the judge anymore than the interpretation of a piece of code should depend on the server it's running on.
If you cannot financially bound the cost of a contract dispute, you need to bake the cost of expensive lawsuits into the price of your product. And if you look at most class action judgments, a very large amount of the money (often the lion's share) goes to the lawyers rather than the aggrieved party.
With the recent Supreme Court rulings [1,2], it is now possible to include an incantation in your contracts that enables truly binding arbitration:
Arbitrator [has] exclusive authority to resolve any
dispute relating to the [Agreement’s] enforceability
including...any claim that all or any part of this
Agreement is void or voidable.
One last thought: you might say, ok, that's fine for the business, but what about the individual who doesn't have the time to read 20-page constantly changing terms of service (TOS) agreements? One answer could be a simple contract review site/search engine. For most large companies, the TOS/contracts are the same for all customers. If you actually care about what you're signing before you're signing it (and in some cases, like large enterprise deals, you really do), it could be interesting to put a TOS review site together which drew traffic from reviews of high-volume free TOS's (like Facebook's or Google's) while monetizing by reviewing confidential or lower-volume TOS's (like Yammer or Salesforce).
If you pulled a few thousand TOS from across the web, you really could see whether a provision was truly standard, how many other sites have a similar provision, whether that provision has ever been litigated, and similar metrics. This is one vertical among many in the legal field that is ripe for attack by computer science.
That is indeed a big advantage, but not for you. If you are an individual and the counterparty is a large corporation, the predictable outcome is that you will (almost certainly) lose, notwithstanding the merits of the case.
It doesn't really matter, though; putting blatantly unenforceable clauses in contracts is fairly common practice simply because they _seem_ enforceable, so someone who feels they were wronged is less likely to "waste" their money on talking to a lawyer. (This seems to be most prevalent in employment contracts, especially in regard to non-competes.)
Hopefully that helps.
"You agree that if Bill Gates comes up to you tomorrow and offers you $1B, you can't get out of this. You also agree that if you read a post on HN about our investors being crappy that you can't get out of it. If those events/data were known to you at the time of signing this, you wouldn't sign this document. However, you're saying that you accept the risk that you might find out some information that would have made you not sign this."
In some ways, that makes sense. When doing business dealings, you often don't have information that if you did have would alter your decisions.
I'm not a lawyer, but the difference between this release and a "general release" would be whether discovering information not known by you at the time of signing can let you out of the contract. I remember my partner (who is in law school) talking about a contract where one party had withheld information that would have materially changed the second party's likelihood to sign the agreement. I don't actually remember how the court ruled on it.
In this case, it's possible that the producers of the show might have sent around emails saying, "this team's idea is pure crap, but we need to fill the time." Knowing that might change whether you want to sign up since, if the producers think it's crap, there's a greater possibility that the investors on the show will as well. This also feels a bit on the deceptive side of things. They're withholding their opinion of the team and by doing so it makes the team more likely to sign.
I wouldn't go on some VC reality show, but I think it's partly motivated by the fact that they must deal with lots of different people and some of those people might think it good to sue if they get jilted on the show. As a counterpoint to a deceptive scenario, we could see a suit where the team alleged, "If I had known that none of the investors were interested in X-Industry, I would never have come on the show. They were from Y and Z-Industry and if I had known that, I wouldn't have given away 2% of my company." The retort could be, "well, we can't have investors from every industry and often investors invest in things outside their core". In this scenario, ABC was trying to do good - introduce a team they liked to investors who might branch out into their industry. The ABC team might have believed in good faith that the team was awesome and would persuade the investors. However, the knowledge that the investors were from a different industry might change the team's decision on the contract. Nothing was withheld in a deceptive manner, but it was still data that might have changed the team's decision.
In terms of being able to waive rights, some you can and some you can't. For example, in my state, if you have your own private entry/egress, you can waive your right to have the landlord do snow removal. At the same time, there are many things that renter's can't waive their rights on. Sometimes laws are written as a default. It's important that we've decided a way that this is handled in the absence of some explicit agreement to the contrary. However, other times we genuinely want to establish a floor past which one cannot go. I don't really know a lot about California law.
Again, I wouldn't go on some VC reality show and maybe I'm reading this wrong, but it doesn't sound too outrageous unless I'm missing something. I'm with you - I like dealing with low-key people with sound dealings. However, I don't think people like us are the types that the title conjures up. "Shark Tank" sounds like it's for people looking to make a big bang and get their way - possibly even if it means lawyering up and going after ABC. I'm not trying to defend ABC - I wouldn't agree to be on this show - but this might be reasonable if it's just about making sure that they don't have to worry about people saying, "but I never knew X and if I had known X I wouldn't have signed this" where X is something that wasn't withheld in an intent to deceive, but rather one of the millions of variables that change our decisions. Or maybe ABC is trying to be able to be deceptive and covering themself. I guess I haven't watched the show so I'm not sure what the environment is like.
EDIT: A concrete example (based on on Wikipedia). Right now, Mark Cuban is listed on the show. You want to be on the show because you think Mark Cuban specifically would like your idea. ABC is in contract negotiations with Cuban for the next season. He might not be on the show. Then we get into a big thing of going through emails. Emails show that Cuban was threatening to leave. They didn't tell you that. They reply that it's just part of his hard-ball approach to get the best contract and that they didn't think it was actually going to happen. Seems like a nightmare.
A "claim" is something like--the producers let loose a pack of wolves in the studio and now I am disfigured, or they broadcast on TV that I am a cannibal and eat live children on Thursday nights, and my reputation is ruined. A "claim" is something that you can (normatively) sue ABC about. Bill Gates offering you $8 billion dollars is not a tort committed by ABC. "If I had known X, I wouldn't have done the deal" is not a claim. (Deliberately lying might be a claim, but that's a topic for another day...)
It's a convention in contract law (see meeting of the minds, unconscionability) that you have to have some idea of what you are signing for a contract to be valid, and there's a lot of arguing about what that means state-by-state, etc. California has specifically (attempted to) codify in Section 1542 that if a claim is "unknown" to you it doesn't meet that test. So if you are signing a waiver of liability of injury thinking about things like falling off a ladder, but not considering that the producers deliberately attack you with a pack of wolves, the latter might be an "unknown" claim that you didn't consider when signing the release. Under Section 1542, you could argue that even though you have signed a waiver, the waiver only covered things you would have reasonably considered, which do not include being deliberately attacked by wolves.
What this section does (IANAL) is say "Even though contract law doesn't let you waive a right you don't understand, and even though California has specifically exempted you from being responsible in this instance, fuck that, you're responsible." Which, I don't know if it is an enforceable clause or not, but it's certainly not moral, and it has nothing to do with "got a better deal, now I want out."
When you mentioned "people who use lawsuits as a normative way to do business" and one-sided contract terms drafted by "armies of lawyers with nothing better to do" I thought of Apple, and some other IT companies.
Then to my surprise I noticed you are an iOS developer.
Not sure what to think.
If you see a clause in an agreement you don't like, it makes little sense to get angry, just politely ask them to remove it.
The logic is NOT we give you free advertising -> you owe us monies. The logic is you provide amusing filler in the context of a targeted program and we sell advertising the audience of that show. Just like every other show on our network.
So any return ABC would get from this is logically abnormal, and I would argue morally abhorrent. On what other show does this happen? Would American Idol demand rights to future royalties of all auditioning acts? Would that be seen as fair?
If they were cable only they could do as they wish, but that's not the case.
Here's a excerpt from the American Idol Wikipedia page, talking about the contract:
"The contract the contestants are required to sign gives Simon Fuller's company the right to oversee not just the recording deal for "American Idol" stars, but also control any merchandising, touring, sponsorship and movie deals."
The last episode of Shark Tank had 6 million viewers . If we pick $1/thousand impressions as a reasonable advertising cost, you'd have to spend $600K for 6 million impressions. It's difficult to overstate how good this deal is. That's what you'd be looking at paying for a Google ad that is displayed for a few seconds while a user searches or reads a page (not even looking at your ad). On Shark Tank you're holding people's direct attention for 5-15min.
For you to start losing money, ABC would need to take > 600K out of your business. At 5% equity, that equates to $12 million in distributable net profits. Let's say the life-time of your business is 10 years - that's $1.2 million net profit distributed to shareholders/year. To redistribute $1.2 million/year you're looking at (one imagines) at least 4 times that in net profit before taxes, i.e. $4.8 million. If your net profit margin is an optimistic and very healthy 30% that's $16 million revenue/year.
To be generating $16m revenue/year makes you a pretty successful business and the chances are if you got to that point it's because you were on Shark Tank. Very few people grow a business to that size without spending substantially more than 600K on advertising and investment.
At that point, assuming you still own 65% of the business (you negotiated 30% away to Shark), you're pulling in 780K (65% of $1.2m) per year vs. ABC's 60K/year. And this is a bad deal?
In addition the Sharks know this and have an unfair advantage as investors that would motivate them to make deals. So ABC is also attempting to level the playing field a little bit
No coercion. If you don't like the deal, you're free to avoid it.
The point is, this is a predatory act and it should not be misunderstood as 'fair' or 'ok'.
Doesn't YCombinator give pittance amount of capital for an equity stake in the companies it invests in, with the value proposition being largely in introductions to VCs/Angels and some strategic help? Are they coercive?
I'd actually be shocked if they didn't demand future royalties of all acts that actually end up on the show. I don't really like it, but that's just how that industry works.
And I received publicity from a single syndicated news story (with pictures) about 12 years ago (ran in 20 papers). I can't even tell you how much money that one thing put in my pocket. To this day I have money still coming from customers I picked up 12 years ago. I would agree with those terms in a second.
> The following are actual negotiations between entrepreneurs and investor "Sharks." The Sharks invest their own money at their discretion.
> No offer is being made to or solicited from the viewing audience.
I always found it odd since there was no such title card present in the Canadian or UK versions. I just assumed it was an overly cautious precaution due to operating in the stereotypically overlitigious United States.
I suppose their thinking is that you get advertising when your presentation goes on the air, and you should pay them equity for that.
But it would really suck if you get your presentation on the air and you get completely mocked and humiliated (which often happens on shark tank) and then the production company still decides to take 5% equity out of you.
"The Option shall also vest with respect to businesses other than my Business if I enter into a binding agreement with a shark regarding such other businesses during the two (2) years following my introduction to the shark."
Five percent equity taken from these businesses is unlikely to ever amount to anything of significant value, although naturally the entrepreneurs presenting their businesses may feel otherwise.
And if your business is in so poor of a state that it gets mocked and humiliated, there seems to be little downside to just re-incorporating if you truly believe in your idea. In this case, wouldn't ABC get nothing?
I understand that in the real world, legal ramifications and damage to one's reputation mean this rarely happens -- but is ABC really going to make a stink?
Not to mention the potential to have incredible investors jump on board & exposure to thousands of other potential investors.
Seems like a good deal.
I'd say that if you get on the show, present well and have a decent business model -- you're going to gain a ton of interest after the show airs.
That's of the ones they show. You think they're going to show the ones where it didn't help at all?
The fact is if you appear on national tv and don't do well your idea sucks. So you have tremendous upside and very little downside.
Hardly. They have no control over how their pitch is delivered to the audience.
They decide what they value more: equity in your company or making you look silly for the sake of the show.
And they can always just take both.
From: TrXXX <XXX@gmail.com>
Date: May 27, 2009 12:46:22 PM PDT
To: TriXXX <XXX@gmail.com>
Subject: Shark Tank on ABC
My name is TrXXX and I'm contacting you from Mark Burnett Productions and ABC regarding a new show called Shark Tank. See the trailer here: http://abc.go.com/primetime/sharktank/index?pn=index
It's incredibly hard to get a small business loan from a bank right now. This show provides the opportunity for a smart entrepreneur or inventor to pitch a product/idea or established business to a group of billionaire investors. We are looking specifically for a up and coming fashion designer, someone who has a line but wants to expand their business.
The premise of Shark Tank is simple: you would approach a panel of billionaire investors (see list below) to explain how much money you would need and how much stake they would receive in turn, and get your company, project or invention more capital to either get started or expand the business. The panel invests their own money if they decide to go with your proposal, and the outcome could be an amazing opportunity.
If you are interested in being on this show or have an email list you can circulate this announcement to, please do so. We are trying to extend this opportunity to as many people as possible.
Directions: each interested person should email me directly (XXX@gmail.com) with the following information:
Description of Business/Invention (non-confidential)
Once I receive this, I will send an email that you need to reply to. From there, you can receive an application. Don't wait, we are filming this show in July and are screening applicants now.
Panel of Investors:
Robert Herjavec (Tech Genius)
Daymond John (Founder of FUBU clothing)
Barbara Corcoran (Real Estate Mogul)
Kevin O'Leary (Venture Capitalist)
Kevin Harrington (Infomercial King)
This show has been previously produced in Japan, the UK and Canada under the name, "Dragon's Den." http://www.youtube.com/watch?v=zVo6e7Y8wBo <http://www.youtube.com/watch?v=zVo6e7Y8wBo>;
This does not mean anything - mentioning this upfront would give you time to think whether the deal is fair.
People who want you to sign a bad contract won't state this upfront. I'd rather expect something along the lines "Oh yeah and we also need your signature on this" after you have already invested your time and it seems rude to refuse those people who were so nice to you.
More than anything -- watch for the patterns of investments the sharks make. Consistently, they love companies that have done all the early groundwork and are making a profit of ~$100k-$250k in the last year.
Also, if you are a hacker and also a fan of Mark Cuban, catch seasons two and three. He's a ton of fun to watch!
Also of interest ... I've read a few post-mortems from companies that appeared on TV, and every one of them said their portrayal had been edited for time (actual negotiations had gone as long as an hour in some cases) yet fair.
Can anyone confirm if this is new or not?
What amazes me most about Shark Tank is the difference between "tech companies" and those companies .... they won't hesitate to tell someone their business isn't even worth $100k whilst 'companies' with half a product and no users raise seed rounds at multi-million dollar valuations.
Edit: actually was wrong about them only doing it if you take a deal heh.
This is not true but it is a very good example how a contract can be drafted to be completely misleading to a layperson yet completely clear to a court. It goes to show one should always read one's contracts carefully or hire lawyer.
If ABC takes some of the equity, the entrepreneurs are now in a situation where the sharks + ABC have control.
It's a little bit more nuanced than that. Read this:
The Option shall vest only upon the occurrence of either of the following:
(i) I enter into a binding agreementregarding my Business with a shark within two (2) years of the date of my presentation to the shark.
(ii) the initial exhibition of an episode of the Series that includes my presentation to the sharks (or a portion thereof sufficient toallow a reasonable person to identify the name and nature of my Business).
It seems to me that the 2nd section here says that the royalty/equity options also vest if you get a deal from someone else after the show airs, if they can say that the new investor only found out about you from your appearance on shark tank.
They have 2 years to exercise their option if you get a deal, or they can exercise it when the episode airs.
The 5% equity choice is new, but doesn't surprise me. When I was on the first season it was only the 2% lifetime royalty. It's not actually that bad of a deal because the royalty was taken out of net income - NOT top-line revenue. So, even if Zynga was on Shark Tank they wouldn't have owed ABC a lot of money.
I was called about once a year after the show by the show's lawyers to collect the royalty. I had shut down the business immediately after the show aired, though, so I never did end up sending them a check.
2% of future net income isn't really a bad deal for most of the kinds of businesses that appear on Shark Tank. None of these companies are VC-investable, and these kinds of royalty-for-placement deals are common in the infomercial industry (which is what a lot of Shark Tank businesses are - informercial products).
I worked for Barbara Corcoran for a year after I was on the show - she's a class act and probably the one Shark that takes her investments seriously.
I've answered several questions about my Shark Tank experience on Quora: http://www.quora.com/Nate-Berkopec/answers/Shark-Tank-TV-ser...
I wonder if Shark Tank has better/worse terms than those other shows.
Websites are a bit different. Remember the grandma nanny? I actually looked them up out of curiosity, but even then, 5% is a lot for a few hundred maybe thousand viewers.
If anything, the show should pay the contestants. They are getting lots of viewers and selling a ton of advertising from hard working entrepreneurs.
Why even put that in the document? Further, the document leaves so much open to negotiation it is basically guaranteeing if you are successful you will have to go through a lengthy legal proceeding. Its almost as if the attorneys wanted to figure out a way to make more fees later.
Not to mention the fact that half the time people go on the show with massive sales in major outlets but desperately need $60k from Damon John to get over the hump. The other half they have no sales but turn down an offer from Mark Cuban because it is 15% more of their crappy company than they want to give away. Is there any struggling entrepreneur in the real world who would actually turn down ANY offer from Mark Cuban?
I've also heard that a lot of the deals don't close because the contestants lie about sales or something of the like.
All that said I do watch the show. After all it is entertaining and Kevin O'Leary's quotes are hilarious.
He comes off as a bit of a scumbag on the show - he frequently makes exploding offers that will expire if the entrepreneur doesn't accept them within 30 seconds, or he'll state that he'll withdraw his offer completely if they even talk to another one of the "sharks" about the possibility of another offer.
After watching the show I'd be very wary of working with someone who negotiates with people like that unless there was a more equal footing.
But the reality is that most people who go on the show need sales, and having Mark Cuban willing to advertise for you on Twitter and such is very valuable for a growing business. His "expertise" is of little to no value. I certainly agree with you there.
I wonder if you could use something like this as a platform to promote an open source project. Might be worth doing just to annoy them when asked what sort of IP protection you have on the idea you are telling them about.
Sounds like 44% is the max you should ever offer, and even so I'd have my attorney add a clause that said that if a shark invested ABC would have 60 days to either join the round or pass. Of course they probably would tell me that I wasn't an acceptable candidate then :-).
Having dealt with many people starting companies over the years it is amazing to me how often folks get hung up on things that are 'known' by folks who do this a lot.
Perhaps there is an opportunity for MBAAcademy. :-)
You never/rarely see an entrepreneur enter 'the tank' who is Harvard MBA trained and shit hot. They weed those guys out during the application phase. (not saying a Harvard MBA makes you a good entrepreneur however)
Seems a little wishy-washy, doesn't it? What happens if they can't agree, or do they decide this up-front?
It also seems to imply that they want preferred stock, which strikes me as bit odd, to say the least.
As if they'll agree to take the lower return option just because someone has expressed their preference. Not sure if they're trying to be nice, or just trying to make you think you have some choice in the matter.
If we do a little bit of math, it's easy to see that it's not an outrageous amount. How much does it costs 10 minutes in prime time? And even, probably, you business is gonna grow even more than the 5% that they take out.
Five percent of Facebook is (in theory) worth ~5 billion, while ABC itself is worth around 3-4 billion. If Instagram had been on the show they would have gotten $50 million a few weeks ago. For half a million dollars you can buy your own 30s commercial, and that's a bad deal for nearly every startup in the world.
I am starting a project pitching platform, http://picocrew.com/presents/picocrew
one of the problems that I am facing is to decide what kind of business model to take, and one of proposed business models is to take 1-2% equity from the project. After a lot of going back and forth with several people, there is one glaring flaw in the model. The success rate of business is very low, especially from unproven teams.
The success of the proposed business is imperative and considering the statistics, over 90% failure, this makes it a really unattractive proposal. I realize Shark Tank offers 2 things: exposure and seed money, what I wonder is the actual success rate of the projects that have been funded by them.
That all seems a little extreme though... but I'm surprised that the producers agreement is so short and doesn't take this into account.
Effectively, this makes it the new QVC model, because the exposure helps even the non-deal companies.
Imagine if every reality TV actor had to agree to give a portion of their future earnings to the network, in the event they become very successful.
The question is, if you ask ABC to delete this provision, is it a deal-breaker?
Some will just blindly agree to it, no doubt.
Contracts can protect you too, just don't sign anything you don't 100% understand.