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So what are the tell-tale signs that you need to watch out for when considering investors for your start-up? Here are three things to watch out for.<\/p>\n<\/div>\n<\/div>\n<\/div>\n
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1. A case of misdirection:<\/strong>\u00a0There\u2019s a good chance any investor who spends too much time talking about what THEY can \u201cbring to the table\u201d (other than their financial investment), is almost certainly trying to draw your attention away from some other part of the deal which is less attractive. For example, it could be a low valuation, small investment or bad term sheet. Don\u2019t fall for this. Unless they\u2019re willing to sign an agreement holding them to their non-financial investment, be very wary.<\/p>\n<\/div>\n<\/div>\n<\/div>\n
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At Found, in the early days, we once had a prominent VC tell us to reject a significantly better deal from another party to take theirs \u2013 despite them offering a lower valuation, smaller investment and much worse term sheet. This was because they were \u201csmart money\u201d who could \u201chelp us along the way\u201d, however when questioned about where they had done this in the past, they failed to provide any concrete examples or references. No thanks.<\/p>\n<\/div>\n<\/div>\n<\/div>\n
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2. The devil is in the detail:<\/strong>\u00a0\u00a0For early start-ups, this really means, \u201cthe devil is in the term sheets\u201d (the legal document which sets out what the investor is contributing, and what rights they get in return). In normal business, working out who controls and owns a business is pretty straightforward \u2013 it\u2019s whoever has the most shares. This is far from the truth for \u201cearly stage\u201d deals though. Any founder who believes that they\u2019re still in charge because an incoming investor only owns a small fraction of their company needs to be very cautious.<\/p>\n
It\u2019s relatively common for investors to introduce terms like \u201cFounder Vesting\u201d (you \u201cearn\u201dshares in your own startup over time), \u201cRatchets\u201d (if the business doesn\u2019t go well, the investor get more shares for free), \u201cBad Leaver\u201d (if you leave on bad terms with the investor, they force you to sell them your shares at a low valuation) or \u201cDrag and Tag\u201d (where they can force you to sell your own startup). The VC who we spoke to wanted all of these, which would have left them in effective control of our company, despite contributing only a fraction of the total investment into the business. Again, no thanks.<\/p>\n<\/div>\n<\/div>\n<\/div>\n
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3. Married at first sight:<\/strong>\u00a0Finally, be aware that any relationship with an investor is going to run for many years, and is much closer to a marriage than dating. It\u2019s unlikely you\u2019d marry someone just because they\u2019re interested in you, so apply the same logic to an investor. If the first few dates with a potential partner\/investor include a lot of unhelpful suggestions, criticisms of what you\u2019ve done in the past, or a one-sided conversation where you\u2019re forced to listen to an \u201cexpert\u201d, it\u2019s unlikely that you\u2019d go beyond the first couple of dinner dates \u2013 and you certainly wouldn\u2019t put a ring on it. Don\u2019t take the money if you\u2019re not comfortable working with the individual\/s over a long period of time. I\u2019ve seen it happen, and it rarely ends well\u2026 founders get burnt-out, investors become frustrated, and ultimately, it\u2019s the business that suffers.<\/p>\n
The bottom line<\/strong><\/p>\n<\/div>\n<\/div>\n<\/div>\n
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Despite the upfront challenges and sometimes-dangers of working with investors, there can also be significant upside if you\u2019re able to find a great group of people to partner with to grow your business over time. Globally and within Australia there are plenty of examples where amazing companies have been built with the help of professional investors. Often, these people are well connected, and have achieved success in growing and scaling businesses over time, and this can be invaluable with the right structure and circumstances. Just have your wits about you during the decision making process.<\/p>\n<\/div>\n<\/div>\n
<\/p>\n<\/div>\n
Source: Dynamic Business<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"
By Andrew Joyce<\/strong><\/p>\n
A lot of start-up founders I\u2019ve met believe that if they can raise money from professional early-stage investors such as The Sharks from Channel 10\u2019s Shark Tank…<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":""},"categories":[16],"tags":[17,34,5],"acf":[],"_links":{"self":[{"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/posts\/1804"}],"collection":[{"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/comments?post=1804"}],"version-history":[{"count":1,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/posts\/1804\/revisions"}],"predecessor-version":[{"id":1806,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/posts\/1804\/revisions\/1806"}],"wp:attachment":[{"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/media?parent=1804"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/categories?post=1804"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/cruzandco.com.au\/wp-json\/wp\/v2\/tags?post=1804"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}