4 ms·

Ask HN: First time investor - How do I not get screwed?

• patio11 15y ago
  The biggest piece of advice I have is to not invest any money in a startup if 100% loss of capital would meaningfully affect your life. (n.b. This is the same advice I would give would-be founders and early employees. If your kids can't afford juice boxes unless the startup succeeds, take the offer from AmaGooBook instead.) Otherwise, pg has an article which better articulates pieces of advice I wanted to give like "start being a source of dumb money attached to someone you trust who did this before." See here: http://www.paulgraham.com/angelinvesting.html http://www.paulgraham.com/angelinvesting.html
  • brador 15y ago
    It's not money I need to eat, so not to worry there, but good catch. Do you know if it's possible to have a clause that says something along the lines of "If you guys decide to up and quit I get your site and tech?"
    • patio11 15y ago
      Yes, but I wouldn't really spend my time optimizing for the case where I end up with 100% of nothing if I were you.
• lisper 15y ago
  > hands-off investment > I'd like to avoid getting screwed Those are two mutually-exclusive desires. If someone else is running the show and you aren't in the loop, then they will almost certainly be able to screw you if they choose to. At the very least, to avoid being screwed you'll need to be able to make a credible threat of suing them if they choose to screw you. The more hands-off you are the less credible that threat will be. Investing is like any other job. There's no free lunch, no easy way out, and the more work you do the more likely you and the company are to succeed.
  • brador 15y ago
    Wouldn't a contract solve this? In terms of being able and willing to sue if they start taking liberties, I'm more than willing to do this, although knowing the two founder personalities I don't see this being that big an issue. I note your point about being hand-off. It's something I didn't consider earlier. The question of "what if they decide to quit/change direction to one that sucks?" is something I missed and will consdier further. The main issue I have is with me taking 20% of the current company, what are the methods I need to look out for that future investors can screw me down to 0% equity?
    • gyardley 15y ago
      Shares generally don't vaporize once issued, although you'll certainly experience dilution as new shares are issued unless you keep putting money in to preserve your stake. You'll also always be behind the new money in the preferences stack - newer investors get paid back first. You shouldn't be angel investing, though - not if you'd actually consider suing founders because they might change the direction of their company to one you disagree with, or because they might decide to wind down the company should they fail and be unable to raise more capital. Both of those things are pretty normal, and the way angel investors deal with them isn't to come up with non-standard contractual terms, it's to have a portfolio of many angel investments, so their risk is distributed. If you're only going to be investing in one, you've just got to accept that you've got a very high chance of losing 100% of your investment. Founder malfeasance is the least of your worries - you'll lose it because most companies fail despite their founders' best efforts. All you're going to do here is end up introducing non-standard terms into your investment paperwork which are going to scare away future investors and make the company you're investing in less likely to succeed.
      • brador 15y ago
        Apologies for the misunderstanding, I meant I would not hesitate to sue if an appropriate situation arised. Suing because of a pivot is not something I would consider. That last sentence is an eye opener and I will now avoid non-standard terms. Is there a list/source of some expected standard terms for startup investment? Lastly, do you know of any good sources (other than the PG article mentioned by Patio1 above) on the subject of angel investing? Any good books/sites?
• md1515 15y ago
  Early stage startups are typically built to fail and although $50k isn't a lot in the modern sense of the word, you should really be careful in this situation. You seem to be providing a small seed round so if they are successful, prepare to be diluted significantly (or forced to pay more to maintain equity portion). There are many rounds to come (Best case scenario). The worst case scenario is that the money evaporates along with the startup. 20% of nothing is still nothing, unfortunately. With regard to your acquisition of the site and technology - consult a lawyer. If the startup is incorporated already, then you will have to do some paperwork and you can ask for clauses that grant you I.P. rights if the company goes under. A hands off approach would be nice, but you have to be careful. On the one hand meddling too much will interfere, but on the other hand doing nothing is typically a fast way to lose your money. Best of luck if you decide to invest. If you have any other questions shoot me an email (in my profile)
• AznHisoka 15y ago
  I'm not an angel investor but got a couple of questions: What stops founders from theoretically taking the money and run (shut down company, keep the money left)?
  • chris_dcosta 15y ago
    Of course if you're talking 50K and a hands off investor, nothing. But most larger investors might insist on baord appointments and a reputable CFO, and that's without the legal stuff.