

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

Hi,  I'm looking to invest $50k in a new startup at a 20% share.  I have no experience in investing previously.  It's a hands-off investment, and I'd like to avoid getting screwed on the deal when it comes time to exit/bring in new investment.<p>Any advice?  What to look for in the deal? What to avoid? How to not get screwed out?
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patio11
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>

~~~
brador
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
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.

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md1515
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)

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lisper
> 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
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
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
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?

~~~
gyardley
Hmmm. I'd just go through all the links here, since Gabe did a great job
curating the best stuff online:

[http://www.gabrielweinberg.com/blog/2010/06/how-to-learn-
abo...](http://www.gabrielweinberg.com/blog/2010/06/how-to-learn-about-
angelvc-term-sheets.html)

I should probably step back from what I said earlier and stress that there's
not one canonical set of 'standard terms' - there's just terms that are
typical and terms that are rarely or never seen. Unless there's a compelling
reason, I'd keep things typical.

I'd also Google and read up on convertible debt, which might be a good option.
There are pros and cons to convertible debt, but the associated legal costs of
doing convertible debt are generally lower, so a big chunk of the money you're
investing won't immediately get eaten up by lawyers. You can't avoid legal
bills - whatever route you take, the company will need a lawyer with relevant
experience. But you can minimize the cost.

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AznHisoka
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
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.

