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It happened to me, and so many times with others. An investor promises or even commits to invest, then starts to stall, and finally vanishes without completing the deal, and without wiring the money. In the worst cases, this happens even after a binding term sheet has been signed.
Never mind the disappointment and heartbreak. Vanishing investors, if the situation isn't handled correctly, can cause substantial financial damage. They can also cause other investors to hesitate or abort. In all cases, vanishing investors will waste and burn your most important asset - your time.
So today's 5 startup tips are from my experience and from following other founders closely. Here are some things you can do to deal with the risk of a vanishing investor:
- Do your due diligence on potential investors: Don't take money from just any investor (and not only because of the risk of having them vanish). Get references, and ask to talk to those who received an investment from them in the past.
- Watch for the warning signs: Trust your instinct. Don't excuse any weird or disturbing behavior. Cross-check with references if you see any cause for suspicion. Most importantly, any sign of unethical or illegal conduct, even if it seems unrelated to the deal at hand, is a huge red flag.
- Have good legal help: Many, even most deals fall through, it's just the way it is. But if a commitment has been made, it may be binding or have other legal implications. Be sure to have legal counsel so that you understand the implications of each step in your negotiations with an investor.
- Keep your options: So long as there is still a chance the deal will fall through - basically until the money lands in your company's bank account - you need to keep some open channels with other investors. Of course, this must be done ethically, without misleading anyone or disclosing confidential information related to the deal.
- Money in, then out. Not vice versa: Don't make any monetary commitments, new hires, purchases, etc, based on a promise, or even a contract. Only spend the money you actually have. Committing to expenses before you have the means to pay puts you at the mercy of others and your company at risk of going under. This might seem obvious, but some founders are in such a hurry that they forget to be careful.
Tzakhi and the Meet.Capital
team
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