Fundraising · Angel investing

What questions should you ask before taking investment money?

Patrick Healy Disrupter | Innovator | Management | Marketing | Technology | Operations | Digital

June 3rd, 2016

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. 
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Steven Sheiner Senior Executive, Business Strategist & Entrepreneur

June 3rd, 2016

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.

Anonymous

June 3rd, 2016

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.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

June 3rd, 2016

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?

Neil Gordon Board Member, Corporate Finance Advisor and Strategy Consultant

June 4th, 2016

You hardly ever get a blank check; in exchange for capital, you'll surely be giving up some control. While your business relationship can be (mostly) reduced to contract language, your personal relationship with investors is critical. Ask the same sort of questions you'd ask before getting married (of yourself, as well as of your potential partner).

Thomas Borzilleri

June 3rd, 2016

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.

Joe Albano, PhD Using the business of entrepreneurialism to turn ideas into products and products into sustainable businesses.

June 3rd, 2016

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? 

Michael Queralt President

June 3rd, 2016

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.

Martin Omansky Independent Venture Capital & Private Equity Professional

June 4th, 2016

The operative word you used is "loans". I usually say to potential portfolio members "debt equals death" for start-ups. While their is a place for debt instruments in early-stage companies, I would limit their use to doing things like financing receivables. Another thing: convertible notes are increasingly common in venture transactions, and I can see the logic in their use, especially when valuation is unclear. This is a different kind of debt instrument, and can be useful if structured carefully. The terms and conditions of ordinary debt instruments and/or preferred stock arrangements should be carefully examined by you and your legal counsel. The wise investor will understand the nature and function of risk capital and patience, and will not make unrealistic demands on the enterprise or the management team. Best to avoid investors who do not appreciate the need to feed the company what it needs to thrive. Sent from my iPhone

David Austin

June 3rd, 2016

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).

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

June 5th, 2016

For a small company working with a funder is a lot like dating.  The main thing that you should see is if you and then funder are personally compatible and if you feel comfortable communicating with them.  Asking tough questions now is less important than feeling comfortable with someone that you can feel comfortable asking tough questions later.

The big question boils down to "what do you what from us?"  Also if you are looking for compatible values a lot of the questions and answers will be implicit rather than explicit.  Money *always* comes with strings.  What's important is what they expect from you is something that you can and will be able to give them.

One question that is always useful is "what companies have you invested in before?"  Talking to other people in companies that they have invested in will always be useful.