The Tricks Investors Use Against Founders

There are things that one learns only by going around the block a few times. This article is a good starter list.

Good point.

I think a good strategy would be,

* Spend an entire night reading the term sheet yourself. Your interests in a good outcome (as founder) may uncover details others have missed.

* Ask other founders (who've previously taken investment) to look at the agreement too. A fresh set of (experienced) eyes can't hurt.

* Make the most of lawyers. They've certainly been around the block too, but the trick is to tap their knowledge and not incite a fee-charging frenzy.

* Lastly, search for terms you don't know and try to understand everything. After all, for most of us, it would be one of the most significant moments of our lives.

> Is a lawyer even the right person to look for?

It's very tricky.

If you find a lawyer that sees many deals, then he/she likely knows many VCs and knows who butters his bread.

If you find a lawyer that doesn't know many VCs, then they likely don't know as well the in's and out's of term sheet tricks.

More fundamentally, the problem is that founders are technical (by and large), and they are up against people who do term sheets for a living. It is a very asymmetrical-knowledge situation.

We had pretty good lawyers, but we got the best advice from a couple of guys who had founded and sold their own companies years before and who still had the scars. In my experience, I thought the lawyers sometimes played the whole exercise like an intellectual tennis match - whereas the guys who had been the same process with their own skin in the game could give much more directly useful advice.

For example, a couple of days before our first round of investment one of these guys told us "you do know you'll be expected to sign personal warranties to the investors" - something our own lawyers had managed to forget to mention (and strictly speaking they might have been right as they were, of course, the company lawyers). NB Personal warranties seem to be (were) a common thing required in the UK - I believe they aren't used in the US.

[Edit: I suspect we were made to do quite a few things that would look crazy to folks from the US - our first round of investment was in '97, hopefully things have got a lot easier in the UK for startups.]

These tricks are depressing and bolsters my attitude more toward a profitable yet slower growth start-up, doing without the sleazy investors...

By no means am I saying all are sleazy, but a slower growing startup will not attract the better of the lot.