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An 'Investor' Destroyed My Startup
Let my experience serve as a valuable lesson to entrepreneurs - do your due diligence on investors.
I spent a little over a year and $20,000 of my own capital building a FinTech software. It demonstrated a lot of interest and potential (E.g. a $5 B company was reviewing our product prior to launch to be a client) , but rather wrapping it up and getting revenue to raise money from Tier 1/2 VCs, I had an offer from an investor to put in $1 M at an unattractive valuation.
Myself thinking, 'I don't care about the valuation, I just want to get the money in to accelerate', I accepted - despite being in various stages of due diligence with three investors. After several months of negotiations and many calls a legal agreement was formed... The important lesson here is the 'hidden valuation', that is, in the value of the quality of your investor.
Usually when an investor signs a term sheet, the money comes through relatively quickly and things accelerate, but week after week, and excuse after excuse the money never came in. During this period, having expected the money to come in, I hired my top developers full-time and am now stuck with those expenses - unable to comfortably afford it.
Now, I'm stuck with a rouge 'investor' owning 50% of my company without putting in any a dime, close to $10,000 in bills, and a software I poured a year of my life into and made many sacrifices for. At this point, if I were to raise more money, I would have less than 20% of my company on the first fundraising round (assuming giving a real investor 20 - 25%).
Despite this, the people you have on your cap table and relationships between them can send most top investors 'running for the hills', they don't like drama and founders with little equity - as it decreases motivation and means they can't negotiate attractive valuations for themselves. As much as I would like to admit - this is almost certainly game over.
Had I conducted even slight due diligence, this could have been solved. If I had held out longer and got a little traction, I could have appealed to Tier 1/2 VCs, rather than risk doing business with an unknown entity.
I should also note, I have a background in PE/VC myself, I'm not a fresh entrepreneur either. It's easy to be blinded by logic when someone offers you capital for investment. As a note to all people intending to raise capital - don't be blinded low hanging fruit because it's often, but not always - toxic.
- twervle 7y agoSounds like you're frustrated and also know it's you got you into this.
- vikramkr 7y agoThank you for sharing your story! If the investor didn't put in the money, then surely that's terms for breach of contract, you should be able to kick him out of the cap table. And if your best developers still believe in your vision, maybe they'll be willing to take a pay cut in return for equity if they understand the situation and want to help you work it out? I guess a lesson here is that its not done till it's done and theres money in the bank, but in that same vein, it's not done until theres money in the bank, and if there isnt, then you might still have a path forward to salvage it and return it to it's rue potential.
- _tmel 7y agoTraditionally, yes, but the investor insisted on clauses that were structured in a way for them to retain equity without being obligated to put in money.
- unknownkadath 7y agoMight get a lawyer to kick the tires on the contract language. I mean, ianal, but that cant be legitimate, can it?
- gus_massa 7y agoI agree. Get a lawyer. @OP: Did you have a lawyer to review the weird clause before signing it? Was it your lawyer?
- closetohome 7y agoContract: Investor gets 50% of company. Company might get money someday but no guarantees. OP's lawyer: Sounds legit to me.
- digitaltrees 7y agoGet a better lawyer. Doesn’t sound like an enforceable contract.
- 7y ago
- manishsharan 7y agoDid you have an attorney ? One of the most valuable lessons I learn is that lawyers are really important for founders -- perhaps even more important than co-founders. My advise would be to fire the developer and hire the best attorney you can afford.
- icedchai 7y agoOkay, so the guy didn't give you any money, yet he now owns 50% of your company. You basically gave it away for nothing. How is that possible? Did a lawyer review this agreement? Form a new company, transfer the IP, forget this guy.
- _tmel 7y agoYes, that sounds like the plan.
- renoir42 7y agoIndeed. Use know how, recode in another language if needed, screw the a*e.
- quickthrower2 7y agoHow is it possible to transfer the IP if there is another partner who won’t agree to that? A lawyer would be needed on that one but surely it’s cleaner to void the contract.
- icedchai 7y agoIt depends on his agreement. He may have the authority to do it.
- toweet 7y agoOuch. So sorry to hear. What are you planning on doing at this stage? If the contract you signed is airtight, what next?
- hughes7370 7y agoI’m going to speak with people he mentioned working with to see if he does this regularly, or if some circumstances came up that made him unable to make the investment. If the second, transfer the IP and create a new shell company. If the first, repurpose the business slightly and move it offshore.
- jmpman 7y agoClose the company? If he’s not working in good faith, why should you? Of course consult a lawyer before you go that route.
- vjust 7y agoHe offered you money. There was no clause in your contract about the deadline for the delivery of the money? And the investor had put in weird clauses in there.. That makes you less than smart, and that makes the investor closer to a mafia - and these two parties make a deal!!
- jiveturkey 7y agoWOW. Why on $DEITY's good earth would you give away 50% of your company to a seed investor. Let's assume the money comes in. You'll still be unable to raise a future round. You say you've worked in VC before? You're done, wrap it up. Lesson learned. (and thanks for sharing)
- digitaltrees 7y agoAs others have said, if the investor didn’t perform his obligations under the contract, he is in breach of the agreement, and you can argue that shares were never validly conveyed to him. Get a lawyer, have them review the documents and send a letter demanding the money or the contact will be terminated.
- akhsjdasjhd 7y agoI question whether or not you have actual, valid VC/PE experience if you signed over 50% of your company (at seed stage, with other investors potentially available) without having that equity actually paid for. Sorry for the tough situation, but this is your fault; the investor didn't destroy your company - you did.
- _tmel 7y agoI take fault for letting a bad actor in, which is why I’m sharing my case with everyone.
- quickthrower2 7y agoKeep toughing it out, hope you get this fixed somehow in your favour. It’s not easy sharing something like this and admitting you made a mistake. The good thing is you won’t make it again.
- akhsjdasjhd 7y agoUnderstood, but you shouldn't blame the Investor - you failed to do proper due diligence and also accepted poor terms when there were multiple, other investors potentially willing to fund the company. You shouldn't blame the Investor
- ozten 7y agoAnything posted here is suitable during discovery. The risk/reward of posting on HN... doesn't seem worth it.
- countryqt30 7y agoJust tell the investor: give us the money within the next 5 days or you are out. you broke the contract, so I can kick you out easily and undo it. you back own 100% of the company and can continue with a serious investor.