When entrepreneur Scott Jordan pitched his business to a group of well-heeled investors on ABC’s “Shark Tank” last season, he didn’t reach a deal with Mark Cuban or any of the other TV deal-makers.
But even without a cash infusion from any of the so-called sharks, he walked away knowing that producers and the network could take a bite out of his business in the future.
Buried in his contract is a clause that gives the show’s producers, Sony Pictures Television Inc. and an affiliate of reality producer Mark Burnett’s One Three Media, as well as Walt Disney Co.’s ABC network, the option to take an equity stake in his company or to claim a share of his profits in perpetuity. All contestants apparently must sign such an agreement in exchange for appearing on the show.
The little-noticed provision was brought to light recently when former contestants, including Jordan, wrote about it online. Jordan isn’t trying to get out of the deal or even complaining about it, but some question the ethics of a successful TV show taking a piece of a contestant’s business.
“It doesn’t pass the smell test. It seems very odd,” said Lawrence Wenner a professor of communications and ethics at Loyola Marymount University. “In the old days, it would be taken as bad manners. Now, it’s thought to be savvy reality-program producing.”
Producers and the network did not comment expansively on the arrangement. But some observers said it might simply be a way for producers to recoup some costs in today’s tougher environment.
“Shark Tank,” now in its fourth season, gives entrepreneurs and investors the chance to present their products and to try to make deals with the likes of Cuban, owner of the Dallas Mavericks, on the air. Those who win an investment might enjoy a bonanza.
The episode featuring Jordan aired in March and he hasn’t yet been approached by producers to open his books, but he is expecting that day will come before the option expires. According to a contract that’s online, the option vests if the program airs.
“I suspect … they’re going to ask for financials to see if it’s worth it to become a partner,” he said. “I’m treating it as if they will.”
At stake is a piece of Technology Enabled Clothing, which Jordan operates from Ketchum, Idaho. The company holds a patent for a system that allows the wearer of a jacket, for instance, to wire headphones through the clothing and use electronic devices such as smartphones and tablets without removing them from pockets.
Jordan caused a stir on his episode by rejecting investment offers from Robert Herjavec, who made a fortune during the tech boom of the late ’90s, and Kevin O’Leary, who guided educational software company the Learning Co. through its $4 billion sale to Mattel Inc. in 1999.
The ABC show, shot on the Sony lot in Culver City, has proved to be a ratings windfall for the network. “Shark Tank” regularly wins its 9 p.m. Friday timeslot. On Jan. 11, for example, the program scored a timeslot-best 6.8 million viewers. Some chalk up the program’s success to hordes of viewers who want to see hope and success in a hard economy.
The show premiered in 2009 amid major changes in viewing habits that continue to challenge broadcasters. Most prominently, the growing popularity of time-shifted viewing on DVRs has called into question the value of broadcast TV advertisements. Meanwhile, the increasing quality of cable programming has eroded the market share of broadcasters.
The result has been a precipitous decline in ratings for the broadcast networks; analysts found broadcast ratings dropped nearly 10 percent among viewers ages 18-49 during parts of last year. In November, Disney reported a drop in advertising revenue at ABC.
For the producers, taking a stake in a business offers no risk while presenting an opportunity to defray some costs.
Robin Diedrich, an analyst who follows Disney at Edward Jones in St. Louis, said broadcasters are no doubt looking for additional revenue to offset uncertainty about the future of broadcast TV advertising.
“The biggest issue for broadcasters has been ratings, (and) ‘Shark’ has been a nice hit for them,” she said. “(But) the overall mindset is being creative to think outside the box and think beyond, ‘Here are our ratings and we’re going to sell advertising based on that.’”
“Shark Tank” is not the only show whose producers take a stake in the careers of contestants. Fox’s “American Idol,” for example, requires its finalists to agree to certain recording and merchandising deals.
But taking a stake in fledgling businesses is hardly an industrywide trend for broadcasters and producers, said Rick Stone, an entertainment attorney and partner at Jenner & Block in Los Angeles. However, while the arrangement might be unusual, it doesn’t strike him as inappropriate.
“It’s driven by the unusual format, where you have people with proposed businesses (and ABC is giving) massive free exposure that no other business could get,” he said.
A brief disclaimer that pops up on the screen during the show’s credits states that producers and the network may have a slice of each company on the show, though no details are given. An ABC spokeswoman declined to confirm the terms posted online.
“The business arrangement between the sharks, entrepreneurs, network and studio is a private matter,” ABC spokeswoman Marsha Smith said in a statement.
However, screenshots of a contract between the show’s producers and a contestant posted online indicate that ABC, Sony and One Three have the option to take either a 5 percent equity stake in the business or a 2 percent royalty on operating profits going forward. It’s unclear how many times ABC, Sony and One Three have exercised their option for a stake in the companies featured on the program, if at all.
Taking a stake in the company is no guarantee that the producers will see any profit. Even businesses that walk away with a deal with the sharks have been known to stumble. Among them is Toygaroo, a Silver Lake company that billed itself as a Netflix-like rental service for toys whose principal, Nikki Pope, successfully landed a $200,000 investment from Cuban and O’Leary in the program’s second season. Toygaroo filed for bankruptcy last year and has closed down.
Still, there have been ample investment opportunities for the producers after more than three seasons. About five dozen entrepreneurs presented their businesses on the program in the third season alone, including Jordan’s pitch.
Jordan said those who wish to appear on the program would be wise to view the experience primarily as a means of exposure for their fledgling business rather expecting to raise money from Cuban or the other deal-makers. After all, he said, there is a months-long application and screening process that is compounded by the expense of taking time off to come to Los Angeles to tape the show.
Jordan, who is also an attorney, said he was fully aware before going on the program that the network and producers could take a slice of his business.
For that reason, he presented his patent licensing business – TEC – rather than a more lucrative clothing retail business. That way, he said, the entertainment giants could only claim a piece of his smaller company, rather than both.
He said he’s trying to get as much as he can out of the arrangement. Last week, he was planning a sale on his website to coincide with the rebroadcast of his episode Jan. 18.
Still, he thinks the drama would be heightened if viewers had a better idea of what he and other entrepreneurs risk just to step on the stage.
“I delivered incredible ratings,” he said. “(But) the audience would find the show a lot more interesting if they knew that every entrepreneur is giving 5 percent of their company and has already lost something the moment they step on the stage.”
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