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What questions should you ask before taking investment money?

If you are a startup and are open to taking angel/VC/hard money loan investments from third parties, what are the things you should be looking out for to avoid compromising the company, its values or the product? We obviously want to keep the founders as safe as possible but would love the infusion of cash to be able to get us to the next level or two much more quickly.

14 Replies

Irwin Stein
2
0
Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
Funding is a business transaction. Other than taking money from a drug cartel, what are you concerned about? Angels and VCs don't get to run your business and you don't have to let them have a seat on your Board of Directors. If this ais loan where you are pledging company assets, you need to be able to pay off the loan. In most cases, the paperwork will keep the company in your hands and in your control and the company secrets, secret. if you do. Angels, generally want to profit from their investment. They are not looking to steal from you or require you to act in any way that is bad for the company. Am I missing something here?
Joe Albano, PhD
2
0
Joe Albano, PhD Advisor
Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.
Here are a few:
  • How much money do you really need?
  • When do you need that money to show up?
  • How exactly will the money be used?
  • How will the investment get you to revenue faster?
  • How will the structure of investment impact future (and past, e.g., 3F) investments?
Bill Murray
0
0
Bill Murray Entrepreneur
CEO at Christian Angel Capital Network
Adding to the above comments, we might have a solution for you. Contact me at bill@Christianangelinvestors.com
David Austin
1
0
David Austin Entrepreneur
Entrepreneur
Use a lawyer who has drawn these agreements up before. He'll know how to adequately protect you without being such a burden to the investors as to leave a bad taste in their mouth. Also, get a list of startups they have invested in and ask those founders how it went. Nothing is worse than when you're executing on mark and doing everything right, and you have an investor who's right there behind you in the office to check up on you (as I understand it ... has not personally happened to me).
Joe Heaney
2
0
Joe Heaney Advisor
Guild Mentor
Based on how you phrased the question (open to taking) it sounds like you don't need $$, at least at the present time. there are 2 schools of thought - take $$ when you can/wait until you have more traction thus a more valuable company. My personal opinion has always been to delay. As Irwin stated, taking someone's $$ is a business transaction and must be treated as such. It's the Founder Dilemma - Rich or King. You need to give up enough equity to make their return attractive but you keep control of the company. Depends on the amount and need.
Thomas Borzilleri
2
0
Thomas Borzilleri Entrepreneur
InteliScript, LLC Director-Member / Healthcare Technology Inventor
The questions that are first on my list to ask are:
  • How does the investor valuate my company compared to how I valuate it?
  • What will I need to give up in order to complete this raise? (not just talking about equity but also possible micro-managing by the investor if they aren't passive)
  • Can the investor bring more assets and value to the table than just capital and how could that have a positive effect on the growth of the company?
There is no guarantee that the questions above will have any impact whatsoever in the fundraising process. I think a bigger problem as I find myself in the position lately of failing to effectively qualify potential investors. You never know what an investor will do when it comes time to write the check, but it seems that the majority of investors (at least those that I have interacted with) are tire kickers that apparently have a great deal of time on their hands to snail through a deal.
Steven Sheiner
5
0
Steven Sheiner Advisor
Senior Executive, Business Strategist & Entrepreneur
Here's what I have learned. If the person/group/fund is difficult to work with prior to getting your funding it won't get any better after they give you the money.
Sidney Sclar
0
0
Sidney Sclar Entrepreneur
SID the SECURITY PRO at sidthesecuritypro.com
Terms and Conditions.
Michael Queralt
1
0
Michael Queralt Entrepreneur
President
How are you structuring the investment - is it equity ? or convertible debt ? or a loan ? also what role will they have on follow on rounds ? It is a transaction, make sure that the money is smart money - money that can help you grow and scale the business - if it's not, I would say, wait to find the right money.
Patrick Healy
0
0
Patrick Healy Advisor
Disrupter | Innovator | Management | Marketing | Technology | Operations | Digital
Thanks everyone for the great insights. What we really need is more manpower more than actual cash. The cash could be used for advertising at some point but it will allow us to hire temporary and temp to perm help to grow the company.

The way I would like to approach it is convertible debt. We want the ability to buy the equity back within a certain amount of time to retain it. Of course this will come at a premium but I am confident that we will have those revenues to do so as long as the deal is right.

A big thing for us is that we would love one of these potential investors to be able to actually bring more to the table than cash. We'd love connections or an ability to help us grow the business. TBH, if they bring solid value at that point I think we would be open to not buying back the equity but rather keeping them as part of the team so that we can get stronger.
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