6 min read

The (Sorta) Comprehensive Guide to Shark Tank Terms

The (Sorta) Comprehensive Guide to Shark Tank Terms
Image Credit: Unsplash

If you’re one of the 3 people that hasn’t seen the TV show Shark Tank on ABC, you’re missing out. The show consists of entrepreneurs seeking funding from investors called “sharks”.

I highly recommend the show since I think it’s a great alternative to the usual television shows or movies. There are so many things to learn from on the show specifically for those who aspire to be entrepreneurs.

Here’s a list of terms/definitions that are frequently used in “Shark Tank”:

  • Equity: when participants present their businesses to the sharks, they start by saying something like “I’m looking for $250,000 for a 25% stake in my business”. The 25% stake is the equity that the shark would get if they agreed to that deal. Equity represents ownership of the company. So in this example, 25% equity means that the shark would own 25% of the business.
  • Valuation: the equity stake helps to find the valuation of the company. The valuation of the company tells you how much the company as a whole is worth. You can find this value by dividing the investment by the equity stake. Going along with the previous example, divide $250,000 by 25%. This would give the company a $1 million valuation (because $250,000 divided by 25% equals $1 million). In other words, this means that the company is worth $1 million.
  • Gross sales: this is the total amount of money earned from a company by selling their product/service. For example, if a company sells 1000 units of its product at $5 apiece, their gross sales would be $5,000.
  • Net sales: this is the gross sales minus returns, allowances, and discounts (see what these deductions mean below). Net sales are usually compared to gross sales to determine the quality of the products (i.e. a large difference between gross and net sales could mean a quality issue since many people may be returning the product).
  • Returns: full refunds granted to customers
  • Allowances: price reductions for defective/damaged goods (partial refund)
  • Discounts: a price reduction for customers if payments are made by a specific date
  • Revenue: any income source from a company’s business model. These sources could include net sales, investment income, service income, miscellaneous fees, etc.
  • Pre-revenue: this is a fancy term that means that a business hasn’t started selling or hasn’t monetized their business yet. For example, a business may have a prototype and a pre-revenue valuation meaning they are valuing their company based on what they think they could sell (even though they haven’t started selling). This term is also common with Internet businesses as they build an audience/user base and figure out how to make money from them later.
  • Margin: this is a measure of how profitable a product is (it’s also referred to as “profit margin”). In other words, it shows how much money from every sale of a product that the business keeps. The margin is expressed as a percentage. For example, if a product sells for $5 and costs $1 to make, the profit margin would be 80%. This is found by subtracting $1 from $5, then dividing by $5. This means that the business makes $4 from each sale (so 80% of the sale goes back to the company).
  • Overhead: these are costs that aren’t directly related to the production of the product (i.e. overhead doesn’t include labor, materials, etc. related to the product). I specifically used the word “directly” because some overhead costs are also referred to as indirect costs. Examples of overhead costs include rent, utilities, insurance, legal fees, etc.
  • Royalty: payments made to an investor/owner of a product or property in order for another party to use/sell it. The property could be in the form of a patent, copyright, or trademark. For example, the investor may be paid a royalty of $2 per product sold. If the product sells for $10, then the investor would receive $2 each time someone buys it.
  • Contingency: an agreement to do something as long as another thing happens. For example, it’s common to hear that a “deal is contingent on ABC happening”. This means that the deal will not happen unless ABC happens. If ABC does not work out, the deal will fall through.
  • Scalability: the ability for a company to grow. Refers to a business’s ability to handle increasing sales volumes, maintaining profitability, meeting market demands, etc.
  • Purchase order (PO): a document from a buyer agreeing to purchase X number of products from a supplier.
  • Patent: a form of intellectual property on an invention. This means that the owner of the patent can exclude anyone else from making, using, selling, and importing that invention. No one can copy the patented product!
  • Trademark: another form of intellectual property but for a recognizable word, symbol, sign, or design that identifies a product or service. These could be a brand name like Apple or McDonalds, a product name like iPod or Big Mac, a company logo like a bitten apple or golden arches, or a slogan like “Think Different.” or “I’m lovin’ it”. With a trademark, no other company can use your brand name, logo, product name, slogan, etc.
  • Copyright: another form of intellectual property but for books, movies, pictures, songs, websites, etc.
  • Proprietary: a term referring to ownership in an idea and the fact that no one else can copy you. If you have a patent, trademark, or some other intellectual property, your idea is proprietary because no one else can copy you.
  • Perpetuity: another word for forever. An investor may say that they want “a $2 royalty in perpetuity”. This means they’ll get $2 from each product sold for as long as the product is being sold.
  • Wholesale price: the price charged to a distributor (such as a store) for buying the product in bulk. The wholesale price is equal to the cost to create the product plus a profit margin so the manufacturer of the product can make money. For example, let’s say that the manufacturer makes 1,000 units of product for $2,000 and wants to make $500 for each thousand units sold, then their wholesale price to the distributor would be $2,500 per thousand units.
  • Retail price: the price that customers pay at a store. Going along with the previous example, the distributor bought 1,000 units for $2,500. This means that each unit costs $2.50. Let’s say the distributor wants to profit $1 for each unit sold. This means that their retail price would be $3.50 and each person that buys the product would pay $3.50 for each unit they buy.
  • Market value: the highest amount that someone is willing to pay for a product (as well as the lowest amount that a seller is willing to sell at). For example, a cup of coffee sells at $3 at a coffee shop. It is $3 because people are willing to pay this much and the seller still makes a profit on each cup sold. If each cup costs $100, people would not be willing to pay (because it exceeds the highest amount they are willing to pay). If the cup costs $1, customers would definitely buy, but it is lower than what the seller is willing to sell at.
  • Customer acquisition cost: the amount of money required to get someone to buy your product or use your service. In a very simple example, if you run an ad for $1,000 and 100 people buy your product, your customer acquisition cost would be $10 per customer.
  • Friends and family round: when friends and family give money to the founder(s) of a business to finance their project. As the name suggests, this money may come from parents, grandparents, close friends, etc.
  • Line of credit: this is basically financing that you need to pay back at a certain interest level. For example, if you have to manufacture $100,000 worth of product, the line of credit may be $100,000 with 5% interest. This means that once you create and sell the product, you have to pay the original $100,000 back with $5,000 (to cover the 5% interest). A line of credit can be reused as long as the original sum and interest are paid back. The investor/lender does not necessarily get equity for lending this money but it may be included in their deal. A line of credit alone does not give them equity in the business. An investor makes money from a line of credit through the interest attached to the loan.
  • Convertible loan: a loan that is extended to a business that could be converted into equity. The monetary value of the loan (for example, $50,000) would turn into $50,000 worth of equity in the business. This loan does not have to be converted. If the investor no longer believes in the company, he or she could just get their money back plus interest (like a normal loan).
  • Advisory shares: similar to regular shares (ownership) of a business, but given to advisors of companies rather than employees. It’s easier to give advisory shares to investors because this equity can be used in place of cash and helps motivate investors to contribute.
  • Acqui-hire: buying a company in order to recruit their employees to work for you. This is common in the tech industry where big companies will buy tiny startups in order to hire their founders/team.