Entrepreneurs

When 4 of 5 ‘Shark Tank’ investors passed, this is what won Kevin O'Leary

Charlie Williams and Brad Boskovic of DigiWrap making a deal with Kevin O'Leary.
Photo by Michael Desmond

On a recent episode of ABC's hit reality show "Shark Tank," investors Robert Herjavec, Mark Cuban, Barbara Corcoran and Lori Greiner all walked away from the negotiating table, leaving only Kevin O'Leary. And O'Leary's opening bid to entrepreneurs Charlie Williams and Brad Boskovic was low.

The investor also known as Mr. Wonderful offered the two founders of the personalized wrapping paper start-up DigiWrap $150,000 for 50 percent equity in their company.

Bags made by DigiWrap retail for $8.50 and are sold through a third-party retailer, Zazzle. Tissue paper is sold direct to consumer, starting at $10.99 a sheet.

"The value of your company if you are a supplier to a single customer is not that exciting," said O'Leary. Other sharks felt that while the bags were fun to look at, there wasn't enough demand for personalized wrapping paper.

O'Leary didn't disagree. "It's a small, niche, crazy chicken deal," he said. "That's the only deal and if you don't want it, I am okay."

The two founders, both from Glendale Heights, IL, were not interested in giving away half their company. They had gone into the shark tank looking for $150,000 investment in exchange for 10 percent of their business. So they pushed back.

O'Leary and the entrepreneurs ping-ponged a few offers across the table in the recently aired December episode. The DigiWrap entrepreneurs sensed that O'Leary was interested because he kept talking after throwing down his ultimatum.

Finally, Williams and Boskovic pulled out a secret weapon: The prospect of royalties, through which an investor gets a percentage of each sale.

The DigiWrap duo knew that O'Leary likes royalties. They had done their homework, says Williams in a phone conversation with CNBC.

"We had gone in there with it as a plan B so to speak," says Williams. "We went in there with that idea."

When the DigiWrap founders put royalties on the table, "all the sharks pepped up a little bit more," says Williams.

O'Leary asked for royalties for the life of the business. The entrepreneurs didn't go for that. "We can't give you equity in perpetuity," said Williams.

The entrepreneurs and the investor settled on $150,000 for 20 percent equity, with royalties of $0.05 per tissue and $0.10 per bag until O'Leary gets his $450,000 back. That way, the investor won't permanently be diverting their cash flow.

The deal agreed upon on the show is not yet finalized. DigiWrap and O'Leary remain in the negotiation phase, says Williams. Still, he's pleased to have worked something out.

"It definitely doesn't work for everybody, but for our specific situation we knew it was something that would actually could benefit us and benefit him," says Williams. "When done properly and thought through, absolutely, [offering royalties] can be another arrow in the quiver, so to speak."

Even as they settled on the deal, Mr. Wonderful admitted that he still thought the business idea may be too niche, though he also saw an upside.

"I am not worried about competition. No one else is going to go after this market," said O'Leary, much to the amusement of the rest of the sharks.

Disclosure: CNBC owns the exclusive off-network cable rights to "Shark Tank."