Why I Just Turned Down One Million Dollars
I’m an entrepreneur in my thirties living in (mostly) sunny Southern California. I own a successful business that’s based around my passion for music and the arts. From the outside looking in, I’m living the American dream.
I’m about to put you on game to the dangers of what can happen when you think of an incredible concept, start generating revenue, build an audience, and then realize that to get to the next level you need outside funding. We’re going for a ride, but in the end you’ll be glad you got on the rollercoaster.
After running COLORS Worldwide for the past few years, I realized that there was a lack of live events focused solely on R&B music. We’ve all watched hip-hop dominate popular music over the last five years. There’s been a concurrent representation in music festivals, concerts, parties, and other live events centered around rap music.
Many forget that just as fast as hip-hop is growing in the streaming era, R&B is also on the rise. In 2017, top 25 Billboard Chart toppers included, “That’s What I Like” by Bruno Mars, “Wild Thoughts” by DJ Khaled, Rihanna, and Bryson Tiller, “Location” by Khalid, and Childish Gambino’s “Redbone”.
Unfortunately, the resurgence of R&B music hasn’t kept the same energy as our rapping counterparts in the live space and I knew the game needed something new. This lack of representation is what inspired me to create COLORS Worldwide’s flagship show entitled, R&B ONLY.
R&B ONLY is almost like a hybrid of a concert and party experience. Our event is akin to a high quality EDM show but instead of rave feels, we’re DJ’ing body roll and baby making music from past to present. I’ve worked in entertainment for over a decade as a manager, marketer, interviewer, filmmaker, but nothing I’ve done has been as explosive as creating R&B ONLY.
The first show held in 2016 had about 400 attendees. In a few months we were touring around the country playing in front of crowds of 1,000 or more, in the same concert venues some of our favorite artists had performed.
To show you the scope of our growth, I’m going to be transparent with some of our financials. I believe it’s imperative for the story that’s about to unfold.
In 2017 our gross revenues were at just over 500K. In 2018 that increased 400% to 2.1 million dollars. The R&B ONLY audience had grown so much and quickly! We started to develop a synergy between our product and our audience, going from 42 shows in 2017 to 67 in 2018. Our ticket sales doubled and we had graduated to playing in venues with capacities between 1,500–4,000. The response to our show was overwhelmingly positive. Our audience would tell us that they loved our show so much and many traveled around the country to catch a vibe in another city. I once met a fan that said she had been on eight planes in 2018 to see various R&B ONLY shows and couldn’t wait until we dropped 2019 tour dates so she could schedule her travels around it. This kind of dedication to our show, is what motivates me to grow and expand our company.
People got engaged at our shows, had babies with people they met at R&B ONLY, and tickets were selling out night after night. We soon realized how unique the experience we were providing was.
This growth was amazing and I wanted to continue to scale, but one thing was stopping me…capital.
For companies that are profitable early on, being able to scale at the pace the market demands can be a huge challenge. In the live events business especially, it’s all about planning six to eighteen months in advance, and your current cash flow is often tied up in future show expenses (venue holds, talent, etc).
In this industry, COLORS Worldwide is not a traditional company at all. We produce our shows internally, we are the talent at the shows, we assume all monetary risk by renting out the venues that we play in, we market and promote our own shows, and control most of the ticketing our customers purchase admission through.
From day one it was very important to me to have this type of vertical integration and own our audience. For the average concert attendee, I’ll briefly explain why this is important. Let’s hypothetically use a hot artist at the moment like SZA in 2018. She’s had hit records on the radio, a popular album, and the demand to see her perform was, and still is quite high. Concert promoters will send numerous offers to her agents, and typically they will agree on the highest performance fee possible for her to play a show. The tickets sell out, she plays said show, receives her money, and generally the promoters get the rest of their income from the bar sales, parking, and ticket fees.
Still speaking hypothetically, fast forward 5 years, maybe the public interest slows down for SZA (doubt this would happen because SZA is incredible, but just hear me out). There is no hit record on the radio and fans have moved onto the next hot R&B songstress, who is commanding even more money for a show. Now, SZA still has her core fanbase of die hards, so she wants to play a show and knows that at least 3,000 people are going to come out. Well, because of years and years of not owning the customer data from her shows (emails, phone numbers, geographic location) and taking all those guaranteed payments, she can’t just book a venue with her own money and email the audience saying, “Hey, come see me play here!” Instead, she’s acquiescent to whatever social media company her audience is on (we all know how fast these things can change) to reach her fans. Not only does she have to inform the fans herself, but she also has to rely on a promoter that’s willing to book her. Big change from five years ago when she just had to be willing to play for the right price.
In most scenarios, traditional touring acts are paid a certain fee to perform while giving all of their customer data, much of the profits, and a lot of the overall control to the promoters (Live Nation and AEG are the big dogs in North America) who book them. There is nothing wrong with this model, many artists don’t have the capital to book venues and pay for marketing themselves. It’s understandable why they do this, it’s just not what I’m interested in for our R&B ONLY shows as I’m building a long term business and need to speak directly to our audience until the end of time (cue the Justin Timberlake).
So now that you understand why owning the data is so important, I’ll get back to the point of why I’m writing this.
Despite the workload we take on, COLORS Worldwide runs pretty lean. At the moment we have three full time employees, the same amount part time, and a gang of independent contractors we consistently work with. Being resourceful is a trait that I’ve had since I was a little kid being raised by a single mom, so I take pride in the fact that we’ve been able to get here, like this.
Unfortunately, at the end of 2018 being able to operate like this was winding to an end. Over $100,000 dollars of capital was tied up in the upcoming 21 shows for Phase One of 2019 (maxed out business credit lines, personal debt, etc) and our current cash flow problem was at an all time high.
The R&B ONLY tour happens year after year and with the end of 2018 approaching we were developing the concept and direction for the 2019 show. We worked tirelessly to incorporate new DJ sets, new production, and an overall upgrade that would impress our fans even more. Not only were we competing with ourselves to have a far better show than last year but we aim to stand out amongst all other live events that people pay their hard earned money to go see when they want a break from their normal life.
This meant buying an additional LED wall, new confetti machines, a bubble blower, more stage lighting, CO2 blasters, and a host of other things that cost upwards of $150,000. Money was moving fast but in my mind it was all ok because I was reinvesting the profits back into the product. I mean, what do you really have if you don’t have a great product, right?
At the end of 2018 I found myself at a crossroads. For the past three years, as the saying goes, I had been robbing Peter to pay Paul. Show costs aside, we were growing, and this means paying more in staff salaries, legal fees, accounting, travel, office space, and insurance costs. These all add up on the monthly burn rate and we weren’t bringing in the revenue to cover it all, as the bulk of our finances come in once the shows start happening. Reinvesting all profits right back into the company wasn’t just a choice, without an investment partner, it was a survival mechanism. I took out business loans, lines of credit, and maxed out my personal credit cards, and it still wasn’t enough to solve the cash flow problem. It was time for an actual venture capital partner or at least a $250,000 loan to put a band-aid on our money wound (I would have preferred the loan any day).
Finding a large enough lender was hard. Even though I had made over 2 million dollars in the previous year, traditional lenders want to see an excellent credit score and are risk averse to the entertainment industry. I tried to explain that we’re not just “average concert promoters”. I showed them that not only do we own our audience, we have a personal line of communication with them, as well as a direct financial relationship, but it fell on deaf ears.
In order to grow the business I found myself much more open to taking on an investment partner that would solve my cash flow problem. I knew this meant potentially giving up some equity in something I own 100% of, but I was willing to make that sacrifice in order to scale. I would use the capital to hire a few more key people, produce larger shows that would guarantee significant returns, and invest in our international expansion, after the success of our first show overseas in London a few months prior.
I had meetings with potential investors, asked around my professional network for references, but I couldn’t really find the right fit in a partner. Most people in the music industry (aside from the artists actually making the music) are not innately innovative and I knew a partnership with someone who didn’t think differently about the live music space just wouldn’t work.
In my admittedly short but substantive quest for capital, I was referred to a company whom I’ll refer to as “MUSIC COMPANY X” for the purpose of anonymity.
I hadn’t heard of Music Company X before, but I was very familiar with the end result of their work with artists in another genre of music. They had helped other huge touring acts find global success in marketing, live shows, and streaming. When I met with one of the founders, I was impressed with their wherewithal in the space where I was just a growing seed.
Our conversations started in the fall of 2018, and with that, the courting/negotiation process of them becoming potential investors had begun. My company is based in LA and theirs is on the East Coast so there were flights to meet with one another as we embarked on this journey of what I thought was going to be the perfect fit for a partner. Not only did these guys understand the live events business, but they spoke the language of a startup as they ran a team with a few dozen more employees than me and had recently took on an investment of their own to scale their business. I always told them I wanted to retain control of my company but wouldn’t mind selling them a minority equity stake. I was confident they would understand where I was coming from because they had been in the same spot with their investors at one time.
In our initial meetings I stressed that cash flow was my biggest issue and they informally asked, “How much do you need?” I had a roadmap of what it was going to take to get my company’s revenues to over $5 million in the next 18 months so I answered them with, “I could make it happen with 1.5 million dollars.” They went to the drawing board, took a few days and told me that they’ll work on a deal but might need some more info which led to the “due diligence” process.
When a company is investing in another one, due diligence is basically making sure everything you’re saying is true. You may have to send profit and loss statements, tax returns, sales data, debt the company has, and just generally open up your financials to this potential partner.
Of course, during this time I was doing my own due diligence on Music Company X. I had found out that this “fund” that they had access to capital through was not actually theirs. In fact, it was managed by the people that likely invested in Music Company X who were in the private equity industry. I can’t guarantee this but my Google sleuthing lead me to believe this is the case.
Off the rip I realized, not only am I dealing with these guys at Music Company X, but also other private equity businessmen that I’ll probably never meet in person and presumably don’t know much about current R&B music culture. Yes, these were the real people standing in front of me and my one million dollars!
Even with my new concerns, I proceeded with the ongoing process. We agreed on a time for me to fly east so they could present me with an offer. I was busy with tour preparation in California so I had to fly across the country, have the meeting, and head right back to the West Coast that same night (what a day that was 😴). When I got to the office I met some of the other staff, talked more about what our partnership would look like, and the more I was there the more I began to feel comfortable.
After lunch is when the leadership took me into a room with smiles on their faces and presented me with what was the first offer of my deal with not Music Company X, but their parent company, “SELL-YO-SOUL RECORDS” (this is a joke but at the time not a damn thing was funny).
“$1 million dollars for 40% equity in your company at a 2.5 million dollar valuation! How does that sound Jabari?”
At that moment I wanted to walk out of the room but I had more respect for them than that, even after they just hit me with the most disrespectful deal ever. For those that don’t know, a valuation is ultimately the dollar amount that your company is currently worth. In November 2018 my company was on track to make over 2 million dollars in revenue by the end of the year.
There are many ways to come to a valuation but usually it entails applying a multiple to either the gross or net revenues of a company. It was now winter 2018 and we still had a few shows left to finish out the year. Once those shows were wrapped up and I shared new financials and their offer increased to $1M at a 25% stake in the company.
Even after the complete revenues came in from the final 2018 shows, I still felt like their new offer severely undervalued my company. They had increased my valuation to 4 million but I thought we should be around 6.3 million (I applied a 3x multiple to 2018’s gross of 2.1 million dollars). We argued on this point a lot and I thought that fundamentally, net revenues were not a fair assessment of value. When you are a young company you make decisions that impact audience and growth with the intention that it will result in much more money later.
I was approaching my wits end. I kept thinking that for the betterment of the company and most importantly, to ensure I could pay my staff, I’d settle at selling them 20% of the company for $1 million dollars at a $5 million dollar valuation. We were embarking on a huge challenge with this tour and I didn’t want to be worried about making payroll, accruing debt, and I wanted to start planning our larger shows for later in the year.
Once we got to the handshake agreement on equity and valuation, it was time to discuss the terms of the deal and how the money would be deposited. I’m not going to bore you with the details of our months of back and forth, but rather explain the most scrupulous points of their initial offer:
- Institute a board of directors consisting of me, a representative from Music Company X and another mutually agreed upon party
- Submit a yearly budget to the board of directors and agree that any expenses over 50K and salaries over 100K would need board approval
- Receive approval of any appointment of officers in the company (Chief Operating Officer, Chief Technical Officer, etc)
The board thing was strange because they wanted me to go from having a 100% say in business decisions I was already making, to now having a 33% say, permanently. These deal points are actually not that unusual, but they are normal for a company that is just starting out with no income and no proven audience.
This is lunacy for a minority stake in a company that has grown 400% from 2017 to 2018. There are people that get $1 million dollars with these type of terms, with just PDFs and business plans that make projections for the kind of success that my company already has. To say the least, I was turned off by these deal terms, as Music Company X had officially tried to play me.
I took some time to think about it and didn’t take it personally. I talked to my lawyer and advisors, and came to grips with things changing within the company. Again, the partnership and the money were worth it at the time so if from now on I always had to talk to people to get approvals before making decisions I would have to learn to live with that.
In my negotiation process I got the monetary board approval thresholds of 50K (expenditures) and 100K (salaries) bumped to 250K and 150K.
I proposed a situation in which, after the investors make their money back, the monetary approval thresholds would completely go away. Their capital risk would be gone and they would be making 20% profits in perpetuity.
They denied it.
This is when it really started to seem crazy for me. This was now a deal where in the future, when we are a 20 million dollar a year company, if my investors didn’t agree with me on a decision that was “not in the yearly budget” and over 250K they would have the power to reject it! I’m not spending 250K left and right at the moment, but when we are bringing in 20M a year I’m sure that will have to change. To give this liberty to people who are not in the trenches with us day in and day out, running the business, leading our team, talking to fans, and understanding our culture thoroughly, is my definition of “selling out”.
If I wanted to donate 251K to my alma mater Howard University or a charity of the company’s choice, I’d have to get approval. If I wanted to book Chris Brown to perform at R&B ONLY and his fee was 350K, I’d have to get approval. If I had an idea for a brand new show concept that needed 500K to get off the ground, guess what, I’d have to get more approval. Hell, if you, the person reading this, had the next big idea and needed an investment from COLORS Worldwide to get it started and it was over 250K, I’d have to get an approval before being able to write you that check!
This deal was becoming harder and harder to agree to but I needed the money so I was willing to compromise, more and more.
Rule number one of a negotiation, it’s not a negotiation if you’re not willing to walk away.
I knew with 1 million dollars I’d be able to blow COLORS Worldwide up and provide so much more value to our audience around the world. I had to make a decision that was bigger than me. If that meant getting these approvals from this newfound board at the expense of what I thought was right, so be it. It’s for the company!
But what happened next was the last straw and I got hit with this small term sheet addition in the 11th hour of our negotiations right before the deal was about to close:
- Jabari will have to enter into a 5 year employment agreement with COLORS Worldwide. Jabari’s 80% equity would vest quarterly over 5 years. Unvested equity would be forfeited in the event Jabari voluntarily ceases to provide employment services. Vested equity would be subject to repurchase for Fair Market Value at the company’s option in the event of Jabari’s departure from the company (other than if termination is the cause for Jabari’s resignation, in which case company has option to repurchase equity at a 20% discount)
The above states that for 1 million dollars I have to take something I own 100% of right now, agree to own 0% of it the day the agreement is signed and money is deposited, and then work my way up back to 80% ownership over the course of the next five years. 🤮
Not to mention that as soon as I sign this deal, Music Company X would own their full 20% immediately. In fact, there was nothing in the deal that said they were obligated to do anything except deposit the money. The reality is, I’d have to work my a$$ off year after year just to get back to 80% ownership in my own damn company. All the while, they wouldn’t even be obligated to answer a phone call from me ever again if they chose. I understand that initially they needed to be protected, but I couldn’t shake the fact that even after their investment is repaid (with interest) and they’re entitled to 20% of our net revenues, that I wouldn’t go back to having control of my company…forever (for eva’ eva’, for eva’ eva’).
If I fell ill in a year and wanted to leave my equity (which is currently worth millions of dollars) to anyone other than myself, they would receive a lot less than what I actually own now. All the while, these “strategic partners” would likely make their play to acquire the lion’s share of my business, at a 20% discount!
It’s ironic that the day this final term sheet came in I had just read an article entitled, “Kanye West’s EMI Contract States He’s Not Allowed to Retire.” It was like the universe and internets hit me up in a group chat warning me not to sign this deal.
My experience is parallel to what traditionally happens to artists in the entertainment industry. I understand the need for a financier to feel secure in their investment because they are taking a monetary risk and the opportunity for a return is not guaranteed. However, there is a way for them to achieve that without having to turn an owner into an employee for the rest of their life.
What’s funny is that the same day that last term sheet came in, I met with a different funding partner — one who actually manages a $100 million dollar fund and was excited about the possibility of giving our business a smaller loan at a modest interest rate. They proposed the idea of establishing trust and seeing where we can go from there.
The point of me writing this article was to show young entrepreneurs, artists, and creatives, what people will try to take from you if you let them. Sometimes you can’t own everything, and each situation is different. Investment in anything is a risk. If your investors are looking to mitigate all risk in their involvement with you, and control you forever they are probably not the right partner.
I always thought about making a million dollars and what that would mean. Would it make me wealthy then? Have I “made it” once I earned a million dollars? Not really.
I was able to turn down a million dollars but I don’t have all the answers, or know what’s going to happen with us financially. I do think that something better will come along and not at the expense of my freedom, or as the leader of my team. I have to remain diligent about whatever deal we do. I’m responsible for my incredible squad at COLORS Worldwide and owe it to our audience, who deserves more memorable experiences they will never forget. There’s a long road ahead to the finish line but we are just getting started!
I actually feel richer by turning down their million than I would have if I had taken it with those terms.
On a positive note, with my back up against the wall and a million dollars out of the window, I just closed an $80,000 partnership/marketing deal a few days ago and there are more opportunities on the table. Today, business is moving forward and we live to fight another day.
If you’re a fan of us reading this, the best way you can support is:
- Get a ticket to the 2019 R&B ONLY tour in your city now. You don’t want to miss this year’s show, it’s our best yet!
- Buy R&B ONLY merch here.
If you’re an investor, financing partner, or are interested in sponsoring COLORS Worldwide/R&B ONLY you can reach me at Jabari@colorsworldwide.com (come correct, see above).
To everyone hustling, keep it up! Most success stories are epic tales of endurance and I’m ready to see you write yours.
If you made it here all I ask is that you share this with somebody that may need it. Left my social media below, ✌️.