Entrepreneurs should know who they’re taking money from. Otherwise, an investor could pull a fast one on them.
Chris DeVore, a startup investor and advisor, warns about one shady move angel investors sometimes make on his blog, Crash Dev.
He details investors who act supportive of startups early on, providing introductions and assistance as needed. But when it comes time for startups to raise the next round, the “bad angels” show their true colours.
Entrepreneurs are most vulnerable during the fundraising process because they’re often low on cash and under stress. That’s when “bad angels” take advantage of them.
“This early investor makes a private demand to the CEO for a substantial equity grant (one or more full points pre-financing) for their ‘invaluable assistance,'” DeVore writes. If they don’t get their wish, they’ll deny the entrepreneur future help.
“Using this moment as a leverage point to extract value from highly stressed founders who are giving their all is an egregious violation of investor trust and ethics,” DeVore says. He urges startups to reference check before accepting money to prevent this from happening.
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