5 Reasons to Reject an Investor
I have extensive experience working with venture capitalists, so I decided to share some thoughts with my colleagues from other startups about when one needs to reject an investment offer in one’s company.
I am one of those startuppers who believes that relationships between participants of a project should be based on partnership. What does this mean?
You (the founders of the project) and the investor should agree in terms of knowledge, opportunities and connections to make not just a successful project, but a company, which will be worth a lot of money and will be compelling for industry leaders.
Therefore, from the point of view of the startupper, I will describe five basic situations in which the founder of a company should reject an investor. It is worth noting that we are talking about venture capital investments into Internet projects at their seed and early stages, up to $10 million per round.
1. Not Willing to Provide Connections and Experience
Right at the first meeting, after the presentation of the project, name Top 10 meetings and things you cannot do on your own. Do not ask, but demand assistance. The heavy hitter will add the same number of connections and things to do to your list. Add all this carefully in your notebook, and then send it to the investor and other participants in the process so they will understand how hard they should work. You need smart money, not a bank loan.
In turn, not all investors are willing to help a lot, so it will be fair to let them know what you want.
If the investor begins to “float” and does not give you clear answers, you can stand up and leave. You do not need someone who will not be able to take the company to another level with connections, many of which cannot be bought with money.
2. Suggests Investing Your Own Money
Once you hear even a hint of this — stand up and leave.
The role of the investor is to invest money in the right companies, to leave them after a certain period of time, and to obtain a positive balance from the process. In other words, the investor is money.
Your role is to not sleep at night for many years, to save money for the prototype, to gather a team of like-minded people, to work on the prototype, to launch it, and to spend your last money on its maintenance, to work during evenings and weekends, to deprive yourself of free time, etc. But the point is clear: you invest yourself. How much are you worth? Only the market knows this. That is the sum of money that someone can spend on your project if you convince them that it is one that will be a success in two or three years. That is how much you are worth.
You should not forget, of course, about financial indicators, applicable multipliers, and other smart formulas.
The investor invests money, you invest yourself. If the investor asks you to invest money, you should ask him to come to work in your company as a hired employee.
This is especially true if you are asked to invest a big sum that will substantially change your life for the next few years. You will not be able to work calmly: instead of thinking about development, you will dream of earning money to make up for the loss.
3. Wants a Share of More Than 30% per Round
30% per round is too much. There will be a lot of rounds. The more successful the company, the more rounds it has. Therefore, it is not necessary to be a brilliant mathematician to calculate how many you will have after three rounds at 50%.
The rounds should be at 10–20%, preferably less. Do not dream that you will be able to get good results immediately after one round at 50%. It is almost impossible. But three or four rounds at 10–20% will surely make you a leader.
Imagine that you spent three years of your life for the company and your share is 15%. You became a professional in this niche and got all the connections. You understand the economy. Will you be inspired to work for another three or four years for the same 15%, if you understand that you could leave and do similar business? Of course not. But if you have 50–60%, then it is a different story. You will think: “Seems like everything is going well. Why should I risk it? I will not find better conditions.”
4. Wants to Take a Lead or Tell What to Do
The investor is your assistant, not the boss. You ask for help, he helps. If the investor starts to interfere in the business, shows a desire to take the lead, or tries to replace key players without your consent, then stand up and leave. Here we come back to the first two points — the role of the investor is investment and assistance. You deal with everything else.
On the other hand, you should be able to listen, to try to understand, and to appreciate all the assistance that comes from the investor. It often happens that the investor is like you, but 10–15 years older, so he already went through similar problems. Therefore, your partnership is particularly important at this point in order to confidentially discuss even the thorniest issues, including admissions of guilt in some cases.
5. Restrictions on Work in Similar Companies
In California, non-compete is prohibited at the legislative level. If documents contain points that limit your work in other similar companies in case of dismissal or resignation, then stand up and leave.
Let me be clear: you cannot even imagine how many opportunities investors have in order to legally get rid of you using legal arrangements. The investor can get rid of you as an employee. Yes, you retain your stake in the company, but you will not be able to participate in the process of development. You may not work for a few years at your own risk because of this. Therefore, never sign documents that restrict you in actions after leaving the company.
I do not claim that this is the absolute truth, but I think that these five points can carry you through the fact that sooner or later a project will be filled with conflicts, the founders will become nervous and will leave, and as a result, several years and millions of investment will be added to the statistics of write-offs.
Great investors can bring a lot of benefits, even besides money. Bad ones can make your life miserable. Before you sign up to work with someone for several years, you should spend an hour or two to ring up founders with whom these investors have already worked and ask for their opinions and experiences.
Treat the investor with respect and expect the same attitude. If the investor is communicating from the position of “I have money and you work for me,” then stand up and leave.
Originally published at atlaz.io