Let’s say that there really is a young founder with a fantastic idea and good progress on her/his own. Will investors see that inexperience as an opportunity to cut a deal that negatively impacts him/her in the long run? What can be done to guard against this?
The best defense is getting a co-founder with the experience that you lack and also to put together a strong board or advisory board. Second is making sure that you have validated your idea and have sales before you seek any investment. VC is not the only route to take. Read Brad Feld's book Venture Deals. Or if you want the "cliff notes" version, you can listen to my interview with him last week. http://thegamechanger.network/bradfeld/
Some will, some won't. It is just like rest of human behavior. There is definitely an asymmetry of knowledge between you and the investor about financial terms and conditions and it will protect the investor against them. One example: liquidation preferences. You can be more prepared: you can read up on all the relevant information; It is all fairly public. You can join an incubator and get assistance. You can find one or two knowledgeable and trusted mentors in your corner.
The answer is yes Renu, but they want your venture to succeed ... with or without you, which can (and should be) a good thing for you. You just need to make yourself indespensible to them. Also, get references for your investors from others whom they have financed.
You need experienced mentors and a good attorney by your side.
VCs are opportunistic, not predatory. They want teams that can execute and succeed internally when things are not going well. The idea is not attractive on its own. They know things will change. They see 1000 and invest in 10. They will not take advantage of inexperienced founders, they will simply not invest.
I want to address all the comments here along the theme of "VC's don't want to screw founders because they need you and they need a good reputation". Those are fair points. VC's DO need founders (or other executives) who will stay engaged and drive the company to a successful exit. And VC's DO need to maintain a decent reputation. However, VC's also have an imperative to maximize returns for their investors. It's not that the VC's are intentionally out to screw the founders, but they are paid to play the game hard and get the best possible return. This can manifest itself in the initial valuation, in preferences, in covenants and vesting schedules, and in many other ways.
So, if you have no experience in this game, you should get some help from people who have "been there, done that". Ideally that would be a combination of entrepreneurial mentors and experienced lawyers. If you have a great idea and you have solid traction, you can attract both mentors and good lawyers to support your cause.
Renu yes you need Valuation.
Yes you need a good Team.
Borrow some if You have too.
What You need is a Battle Plan.
Go and see Erica Drake. Or look up MaverickEntrepreneurs.com
Erica has been in the Trenches and has written a Book on this. More importantly Erica has raised over $200 Million for others. And she herself has owned 3 business. She teaches how to handle investors and those damn attorneys who don't really tell You all the pitfalls unless You ask. But what if YOU do not know what Questions to ask??? Then what!!!
Do You have an Employment Agreement with Your OWN Company?? Learn how to maintain control even if You give away 70% of Your Company.
Set up for a Claw-back at a later date. But get stared. Yes You have a lot to Learn. But its all in her book. Look it up. Better Yet call Erica and talk to her. I am one of her Students. She helped me with my Business Plan and I now have 4 investors that want to give me the $32 Million capital raise I am doing.
Thank You Erica.
Hope this helps You.
Yes and No. Yes because the can do this and they'll do. This is the real world. No free perks here. But No because they won't push that to the line where it does not make sense for you fight the battle. It's you, in the end, who needs to succeed for them to cash out.
You need some expertise you can get from an outsider. Like a person who has done this. Or someone else who is not your investor but wishes good to you.