You are an
innovator with a brilliant mind. With years of hard and smart work you have
developed an AI-based solution that you are ready to commercialize. But you do
not have the capital to move forward with it. You realize you are at the mercy
of outside investors. You contact a whole host of accredited venture
capitalists and angel investors. Months pass by. No positive news. You are
becoming impatient, perhaps somewhat disheartened. As desperation kicks in, you
start to contact the so-called small investors from online lists. They are
giving you big stories about their investment philosophies and portfolio
companies, but without any verifiable track records.
You are so eager to get
started that you are ready to sign up with the one with the sweetest talk and
biggest promises. You know you are supposed to check them out (i.e., do some
due diligence). Other than a handful of references listed on their site
(perhaps developed elsewhere where English is the seventh most important
language) you have nothing else to go by. After speaking to one of them, it did
however don on you that those references could be fake. Yet, you are ready to
take the plunge.
Wait!
Within this particular
investor group there are too many serial thieves waiting to steal your
invention. Since these serial thieves are intellectually incapable of
differentiating between a digital watch with a new alarm tone (wow!) and an
AI-based solution that advances the
cause of humanity, they
will steal anything. But they are generally good at three things: serial lying
(they tend to believe truth is for the devil), serial stealing (they will steal
anything to satisfy and advance their greed) and running ponzi schemes (to keep
some hard-nut clients quiet).
Of course, they
primarily develop their business by stealing client contacts. Needless to say,
some of those contacts do fall for these thieves’ flashy lifestyles, constant
lies and pushy salesmanship, becoming future portfolio investors (a.k.a.,
victims) themselves. At one point, you will find out about it. Anyway, it
doesn’t matter how well you know your investors, do not (share or) introduce
your contacts to them; let it take its own natural course. Obviously, the
contacts-turned-investors (or future investors) are outside the purview of this
chapter (couldn’t care less!).
So, how do you protect
yourself from these serial thieves? Here are some red flags and safeguards:
1. Check them out at the
local BBB and Chamber of Commerce – Ignore the positives (could be
cooked up as they often hunt as a pack) and zero in on the negative
reviews/comments, even if the ratio is 10:1. Contact that one negative reviewer
and find out what the underlying story is. If the investor does not subscribe
to the local BBB or Chamber of Commerce, I would be very skeptical of their
intentions (despite the falsehood you might get from them “Oh, that’s
old-fashioned; nobody cares about them anymore, etc.”). The genuine ones will
brag about their local BBB and Chamber of Commerce standing, etc.
2. Try to avoid the
Key-man Insurance – Since it’s a start-up, the investor may insist on taking
out a large (relative to the money being invested) key-man insurance on you.
Try to avoid it, or at least defer it until the product (based on your concept)
has been launched. If
you have to do it,
insist on having your spouse or parent as the co-beneficiary, preferably 50/50.
If they continue to insist on their business entity being the sole beneficiary,
I would be very skeptical of their intentions and consult a lawyer for legal
safeguards.
3. Initial IP Patent
Filing must be in your name – Do not fall for a joint patent filing (with the
business). If the relationship works out, you can always transfer it to the
business for a substantial fee or equity option. Either way, it benefits the business.
If the initial filing is in the business name only, the serial thieves will do
everything possible to push you out or will create an intolerable atmosphere
wherein you push yourself out. If they insist on their way, show them the
highway and look elsewhere. This clause must be anchored in the first agreement
itself. This is your primary protection.
+
4. You must be the CEO
of the new corporation – If the whole business is going to be founded on your IP,
you must be the CEO of the new company with total hiring authority – no two
ways about it. In fact, the legitimate investors will insist on your
stewardship. The serial thieves, on the other hand, might fuss about it.
Starting out, if you are not in charge, despite what the serial thieves say,
your innovation would be road-killed, just a matter of time! Down the road, you
can always step down, paving the way for a professional CEO, which is quite
common. Again, this must be clearly laid out in the charter.
5. Insist on your own
Independent Office with long-term lease – This will give you more
stability and independence. If you are forced to work out of a room inside of
their offices, you will gradually lose ground and become their pawn. It’s a
trick the serial thieves often play. If they think your IP is valuable, they
must do everything possible to accommodate, nurture and promote your
requirements. While the parent company would be responsible for all rents and
utilities, the lease must be in your company’s name.
6. Insist on owning 51%
shares of the new company – If you own 51%, you may not be pushed out easily. When
you are dealing with a small investor, you are inherently in a high risk
situation, thus requiring higher rewards. Similarly, do not allow them to place
majority directors of their choosing on the board. Also, try to hire an
independent CPA and Lawyer for your company; it’s not a question of bias,
rather a question of transparent billing, meaning your company must not
subsidize their other portfolio companies.
7. Negotiate a sizable salary
during the gestation period – Due to the high ownership percent, if they are unwilling
to give you a salary, you must nonetheless negotiate a decent salary, at least,
until the company becomes profitable (easily two to three years), post which
you must be allowed to sell a certain percentage of your unrestricted shares
every now and then on the open market, thereby enabling you to take care of
your family expenditures.
8. Insist on having the
pre-negotiated capital locked in escrow – Since you are dealing
with a small investor, it is imperative that you ask them to put up the entire
capital in escrow, with a lawyer acting as the escrow agent. The lawyer will
then disburse the working capital on a monthly basis. This is a critical test;
while the legit investors will not have any issues with this, the serial
thieves will invariably try to talk you out of it. If you succumb to their
sweet talk, this is what will happen: Once the business is up and running, one
sunny morning you will get a call for an emergency meeting where they will
announce ‘we are out of money.’ And, there goes your dream. Now you have to get
hold of an expensive lawyer to get yourself distanced from those serial
thieves. Meanwhile, they will go around and tell the world (primarily your
contacts that they managed to steal) how you have destroyed a huge sum of their
extremely hard-earned (LOL) money without producing anything. Do not walk into
this trap!
9. Do not outsource your
IT or other important services to their overseas portfolio companies – Outsourcing IT
services to a quality US-based portfolio company would be fine. But these
serial thieves often set up some portfolio companies overseas, luring you to
outsource some of your essential services, primarily IT, to them. In return,
you will get very low quality products and services coupled with hefty bills.
In no time, your working capital will dwindle, forcing you to sell a
significant chunk of your shares back to them, just to stay afloat – and it
will be difficult for you to get out of this cycle until the eventuality hits
the fan (‘we are out of money’). And, it’s all by design.
If you are dealing with
a well-known/accredited venture capitalist, you are in safe hands. Your success
is their success so they will stand by you through thick and thin. But if you
have to deal with a small, unverifiable investor, do your due diligence. We
know you are not greed-filled. When you succeed, the humanity progresses and we
all succeed.
Do not let a low-life
steal your dreams!
Disclaimer
- The characters portrayed here are hypothetical in nature and any
likeness to any individual or entity is strictly coincidental. The
author is not offering this chapter as professional services advice in any
shape, form or manner whatsoever. Every investor is different, so seek the
advice of a competent professional, preferably an experienced attorney, before
deciding on a non-accredited investor.
- Sid Som, MBA, MIM
President, Homequant, Inc.
homequant@gmail.com
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