The Tricks Investors Use Against Founders • Hacker News Board

Re: The Tricks Investors Use Against Founders

#41

Post by misterbee » Fri, Sep 09, 2011, 3:04 PM UTC

Corruption in investing doesn't just hurt founders. It hurts everyone in the end.

Every time one of these articles about "how investors screw founders" or "how employee stock option are never going to pay out", the pool of employable staff are a little more likely to say "These stock options are worth nothing to me but a lottery ticket, so I'm not going to work hard at this job beyond my salary, and maybe I'll get my win for getting some sliver of equity if the company goes big on someone else's effort or sheer luck." In the end, in a den of thieves no one puts in an honest day's work, and nobody wins.

Bootstrap your business with your own money and your own customers' money, and leave the sharks behind.

Re: The Tricks Investors Use Against Founders

#42

Post by lacker » Sat, Sep 10, 2011, 1:48 AM UTC

todsul wrote: post #12

lacker wrote: post #11

It's important to note that these things are common in the private equity world, not the angel investment or venture capital world. The VC world has totally different tricks, like 3x participating preferred, "independent" board members, collusion, and option pools. Also, if the PE firm is using a 20% discount rate to evaluate the merits of vendor finance, they are likely fooling themselves more than they are fooling…

There are a few ways you can look at this 20% discount rate: * Cost of capital for the fund * Cost of capital for investors in the fund * Cost of capital for the business If you can't earn 15-20% on a business, you really should invest the capital in a less risky investment. Additionally, most PE funds look to double their investments in 5 years. So using a 20% discount rate is somewhat conservative with this in mind…

Additionally, most PE funds look to double their investments in 5 years. So using a 20% discount rate is somewhat conservative with this in mind.

PE funds tell themselves they can achieve a 20% return, but in reality they are on average no better than index funds. See:

http://www.google.com/search?sourceid=chrome&ie=UTF-8&#3...

I stand by my claim that in assuming 20% returns for vendor finance, PE funds are tricking themselves by a greater magnitude than they are tricking founders.

Re: The Tricks Investors Use Against Founders

#43

Post by rprasad » Sat, Sep 10, 2011, 2:09 AM UTC

smhinsey wrote: post #3

How do you find the right lawyer to vet your agreements, as a founder, to make sure something like this doesn't happen to you? Is a lawyer even the right person to look for?

This would be one of the situations where a BigLaw lawyer is a benefit and not just a horrible waste of money. (BigLaw = 500+ lawyer law firms, like Skadden, Cravath, Wilson Sonsini, etc). Those lawyers will personally have the experience handling these situations, or at least they'll have access to someone in the firm who has had that sort of experience.

Wilson Sonsini is pretty popular up in the SF Bay Area. Goodwin Proctor for NY-area startups.

Re: The Tricks Investors Use Against Founders

#44

Post by wnight » Sun, Sep 11, 2011, 12:24 AM UTC

suking wrote: post #35

joshu wrote: post #33

Earlier quoted context omitted.

Jesus, no. You go talk to your experienced lawyer about the term sheet. Not that Brad is wrong about anything. It's just that this isn't a software package where you can google around and read a few blog posts and get up to speed. A good lawyer will be familiar with what is going on, current terms, etc.

Of course you use a lawyer, but you should understand it as well.

And you should do your part first so that you can ask the lawyer the tough stuff instead of paying $X00/hour for Law 12.

Re: The Tricks Investors Use Against Founders

#45

Post by shoham » Sun, Sep 11, 2011, 11:50 AM UTC

joshu wrote: post #38

shoham wrote: post #36

Earlier quoted context omitted.

I think you're mistaken. The title of the article is "The Tricks Investors Use Against Founders". I'm a founder, working on attracting Private equity from investors, and trying to make sure I don't get tricked. I think that this advice is for me!

Heh. You mean private investment. This refers to large scale deals from PE shops. I've personally raised twice and have invested in 50+ startups. None of this stuff happens in early stage VC or angel land.

My original comment:

"Wow. Thank you for the insight, as someone who is working on getting funding for my business."

I don't see any conflict, even if it's 20 years before I need to worry about these issues, I'm just thanking the OP, and author for the heads up...