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James Caan has been an innovative investor in the Den. In particular, it was James who introduced a concept that has proved very useful: the complicated deal.

You see in the old days (i.e. in the first four series before James arrived) deals were quite simple. There was a promise of money from a Dragon or two, and a promise of a percentage stake in the company in return.

Evan will write weekly updates of Den activity throughout the 2009 series.

The bargaining to get to that point was simple too. The entrepreneurs tried to keep as much equity as they could, the Dragons would try to take as much as they could.

Economists describe negotiations like this as "zero-sum games". Every extra percentage share one side wins in the haggling, the other side loses, so the gains and losses from a concession always add up to zero.

What James did was bring his professional investing background to bear on proceedings, to show the other Dragons that deals in the Den don't have to be zero-sum at all.

The clever wheeze is to put the word "if" into the deal.

A typical offer thus says "If you hit an ambitious revenue target, then you get all the equity you want.. but if you fail to hit the target, you lose your first born.." or that kind of thing.

This accelerates the negotiating process because people can reach a deal without having to agree on everything. In particular, they can hold completely divergent views on whether the company will sell as much as the ever-optimistic entrepreneur thinks, while not letting that argument get in the way of an investment.

Which brings us to this week's programme.

Brilliant as James's innovation has been for the Den, I'm not sure why he bothered with it this time.

The situation was that Tony Earnshaw and Steven Pearson were looking for £100,000 to expand their successful cleaning company. Duncan made an old-style simple offer -- all the money for 35 per cent of the business.

Then James came in with one of his characteristic proposals, replete with the word "if", that he would get half the company if things didn't go well, or 35 per cent if they went magnificently.

Now that hardly compares favourably to Duncan's offer does it? On the very best case it matches it, and on any other basis, it takes away far more of the company.

So why would James make an offer so unattractive in comparison to one that was already on the table?

Well, he might have thought Steve and Tony would be so optimistic about their prospects, that they would treat his offer as all but identical to Duncan's.

And that is the risk of the "if-clause" negotiations. It is almost a professional requirement of entrepreneurs that they are mildly deluded about their own prospects, and it is thus a hazard of these deals that they can entice entrepreneurs (who focus on the best case) into giving away too much of their company (in all other cases).

Alternatively, James might have made the offer unattractive because he thought he was so much more attractive as an investor (promising the support of his team of staff, for example).

If so, it didn't work. Steven and Tony were perfectly level-headed: they didn't take long to decide in favour of Duncan's simpler deal.

It's a pity that in this case James had made it such a no-brainer for the entrepreneurs to reject him because the "if-clauses" are most interesting when the entrepreneurs have a real dilemma. You know the sort of thing: you can take Duncan's offer, or take the risk implied in the word "if". If things go well, you keep more of the company.. if things don't go well, you lose more of it. Deal or no deal?

It's the kind of thing that makes business more interesting than television.

Last updated: 5 August 2009