2. The devil is in the detail: For early start-ups, this really means, “the devil is in the term sheets” (the legal document which sets out what the investor is contributing, and what rights they get in return). In normal business, working out who controls and owns a business is pretty straightforward – it’s whoever has the most shares. This is far from the truth for “early stage” deals though. Any founder who believes that they’re still in charge because an incoming investor only owns a small fraction of their company needs to be very cautious.
It’s relatively common for investors to introduce terms like “Founder Vesting” (you “earn”shares in your own startup over time), “Ratchets” (if the business doesn’t go well, the investor get more shares for free), “Bad Leaver” (if you leave on bad terms with the investor, they force you to sell them your shares at a low valuation) or “Drag and Tag” (where they can force you to sell your own startup). The VC who we spoke to wanted all of these, which would have left them in effective control of our company, despite contributing only a fraction of the total investment into the business. Again, no thanks.