It's pretty messed up when you think about it. Here you are, a struggling entrepreneur trying to create something new. You're working ridiculous hours, not getting paid much, and are constantly stressed. As if things couldn't get any harder, all of a sudden a startup vulture attacks you.
I use the term startup vultures to refer to people who try to cheat entrepreneurs for their precious resources. Believe it or not, there are heartless souls who won't think twice about taking the little money or equity you have for their own good.
Don't worry though; I'm going to tell you how you can avoid the most prevalent attacks from these predators. Defend yourself from these creatures, or prepare for your startup to be eaten.
1. Paying to pitch
This is where angel groups invite you to present your company to investors so hungry to invest they're salivating. You're going to make great connections, get funded, and probably be the next Facebook. Even better, they'll even coach you beforehand to make sure you're successful. The only catch is they want $1,000+ for this amazing opportunity.
OK, lets take a step back and think about this. This person wants us, broke entrepreneurs, to pay them so that they'll let us pitch to a group of investors. There are so many red flags to this I almost don't know where to start.
First, if they were interested in our company, why would we need to pay to pitch? Second, why would you charge the people with no money to come, yet let the people who have money go for free? Third, why should I pay you if no one ends up investing in my company? Finally, shouldn't I use the little money I have to build my business rather than just trying to roll the dice on your angel fund?
If this happens to you, under no circumstance should you accept. If an angel group really likes what you're doing, they won't charge you anything to pitch to them. When an angel group tried to use this trick on me, I told them I'd only pitch for free. They immediately said no, and tried justifying their cost because of the value of their time. Yikes.
I stayed clear, and we used the money to build our business. I'd never take money from an investor who charged me for 15 minutes of their time, no matter who they are. Don't fall for this trap. You're better than that.
2. Development firms that partially invest
In rare cases, these partnerships make sense. If you're considering working with a dev shop to build your product, you ideally want to do an equity deal if you're early-stage. It'll help you preserve cash and makes the firm have skin in the game. When you tell development companies this, some will try to negotiate with a split between equity and cash. The problem here is that many times they raise their prices so they really don't lose anything when your company fails. This causes you to waste equity and pay almost full price.
There are several ways to avoid this trap. First, use Upwork.com and Odesk to build your initial test product and push as far as you can without spending any money on development. Second, when you consider working with a development firm, tell them you're only willing to do straight equity. If they tell you no development shop will do that, they're lying to you. We've done it twice for Alumnify.
If they do agree to an all-equity deal, ask how much they are charging per hour and set a limit on how many shares you're willing to give to them. Some companies will try doubling their price per hour for an equity deal. When they do that, double the valuation of your company so it evens out. This is an ideal situation because now the development company only succeeds if you do. This will cause them to work harder and avoid dangerous shortcuts.
3. Demanding equity for connecting you with investors
Like Startup Vulture tactic number one, except now we're being hunted down for our equity from an individual. This is the person who tells you he/she has a list of all these investors, but if you want an intro you have to give up equity. Not only should you not do this, you should immediately stop talking to this person. They're wasting your time. Any mentor who likes your company will make introductions for you without taking your shares. It's great to have people on your team who have connections to capital. Just don't make that the sole reason you give them a piece of your company.
Instead, just learn and copy their strategy. Go to conferences, meetups, and entrepreneur events. When you meet a potential investor, put them in an Excel document with all the other investors you've been meeting. Then, once every 4-6 weeks, shoot them a personal e-mail with an update. You'll be surprised how large your sheet will become. Pretty soon, you'll be more connected than the startup vulture who tried attacking you in the first place.