Warning To All Entrepreneurs About Bad Investor Behavior

I received an email from an entrepreneur today asking me about something that made my stomach turn. It's a first time entrepreneur who is raising a modest (< $750k) seed round). There are two founders and they've been talking to a VC they met several months ago. Recently, the VC told them he was leaving his firm and wanted to help them out. This was obviously appealing until he dropped the bomb that prompted their question to me.

This soon to be ex-VC said something to the effect of "I can easily raise you money with a couple of phone calls, but I want to be a co-founder of the company and have an equal share of the business."

In my email exchange with the entrepreneur, I asked two questions. The first was "is he going to be full time with the company" and the other was "do you want him as a third full time partner." The answer was no and no. More specifically, the VC was positioning himself as "the founder that would help raise the money."

I dug a little deeper to find out who the person was in case it was just a random dude looking for gig flow. David Cohen, the CEO of TechStars, has written extensively about this in our book Do More Faster — for example, see the chapter Beware of Angel Investors Who Aren't. I was shocked when I saw the name of the person and the firm he has been with (and is leaving) — it's someone who has been in the VC business for a while and should know better.

I find this kind of behavior disgusting. If the person was offering to put in $25k — $100k in the round and then asking for an additional 1% or 2% as an "active advisor" (beyond whatever the investment bought) to help out with the company, I'd still be skeptical of the equity ask at this stage and encourage the founders to (a) vest it over time and (b) make sure there was a tangible commitment associated with it that was different from other investors. Instead, given the facts I was given, my feedback was to run far away, fast.

Entrepreneurs — beware. This is the kind of behavior that gives investors a bad name. Unfortunately, my impression of this particular person is that he's not a constructive early stage investor but rather someone who is trying to prey on naive entrepreneurs. Whenever the markets heat up, this kind of thing starts happening. Just be careful out there.

Reprinted from Feld Thoughts

Brad Feld is a managing director at Foundry Group who lives in Boulder, Colorado. He invests in software and Internet companies around the U.S., runs marathons, and reads a lot. Follow him at twitter.com/bfeld.

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  • Mark White

    Mr. Feld,
    Thank You for this insite.  I have been down that road of sorts.  I have been trying to warn people that not ALL investors are who they appear to be.  I lost a $600,000 loan from the USDA because an investor said they had the liquid assets to back the loan,  I was asked to make them a partner (10 shares of the 100 we had).  I felt if we could get things going and the investor had the $140,000 liquid, I could deal with that.  However, the investor lied.  the investor wanted me to help show the assets.  Please refer to my comments on the "10 Tips for Finding Investors to Fund Your Business" by Mr. David Gass.  He is correct, however it's not the investors business, it's an income for them.  Please beware of them and do the checks into investors as they will you.  It's just as important to ask them the right questions as it is to have a great business plan.  The wrong investors will take your company and/or bankrupt you, others will use you for what they can get and have nothing at stake.  And yes, there are good ones out there that will back you, help you and even have someone teach you what you need to succeed so they can make money WITH you.  Most important, DO YOUR RESEARCH, know what you are getting into, check with others that have no interest in you company and know as much as you can about what needs to be done.  This is your dream, your business and your idea.  A good investor will ask about your team, experiance and offer help if they believe in you and the idea.  A bad investor will promise you a bunch and ask for a even more.  Be careful please.
    Mark White