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If you're building a technology startup, there is a strong chance you'll need or want to raise money at some point.
The general consensus from most entrepreneurs is that raising money is a painstaking process. It usually takes twice as long as expected. There is plenty of heartache and stress along the way.
Here are three stories to show that when you're raising money, it doesn't always go as planned:
The Low-Ball Negotiation
We were due to sign a convertible debt deal for $1.2 million, I had submitted an amended balance sheet which included an extra $30k of debt (on top of the $200k on the balance sheet which was submitted during due diligence). The accountant had somehow missed this and so being an honest man, I'd made the investors aware prior to signing (keeping in mind the deal included personal warranties). In the meeting, the Managing Partner slammed the contract on the table and said, "We were going to sign this, but we can't now. We have no faith in your financials. Therefore, instead of 21 percent of the company, we want 75 percent." The startup was distressed and I wanted to do the right thing by my existing angel investors. We haggled and I ended up agreeing on 52 percent, but I should have walked away. Nine months later, I was out of my own company.
Whatever situation the company was in financially--which I was responsible foras CEO--this was a classic low-ball negotiation tactic, better suited for car showrooms than an early-stage tech investment deal.
Two years later the company is now out of cash having been mismanaged, undercapitalized and naively run. They can't raise money, because who would invest in a startup where the VC owns 80 percent? (They down-round-diluted the angels and founding stock further after kicking me out). Ambition is good business; blind greed and lack of integrity is not.
Lesson: Never give away control of your company at such an early stage. Moreover, don't take money from investors who behave like this in negotiation. They're showing their true colors.
It was the first angel network I pitched to, and I was extremely excited. I practiced my pitch deck over and over again for two weeks straight leading up to the pitch, constantly re-writing it to make it under five minutes. When we arrived to perform our pitch, we ended up having to wait an extra hour and a half because the startups presenting before us had run over their scheduled time. We ended up pitching at 1 pm, when most of the angel members decided to go to lunch.
There were only three angels in the room when I pitched, out of the dozen who had listened to the morning pitches. And one of them was staring out the window the entire time. Suffice it to say, I wasn't happy when I later received an email from their director that gave us generic feedback on why we weren't moving into the next phase. The email clearly demonstrated we did not get a fair assessment by their organization. What was even worse is that they charged us $500 to pitch to them.
Lesson: Never pay to pitch. If you do, demand that you get what you paid for.
The Disrespectful Investor
We were cold-contacted by a Managing Partner of well-known venture capital firm. He stated he was going to be in town and wanted to meet with us. Needless to say, we were ecstatic.
Meeting day arrived and we showed up 10 minutes early. The location was an open space, so we could easily see him and vice versa. Although he saw us wave at him, he was in a conversation with someone, so he didn't acknowledge our arrival. We took a seat a few tables over and waited patiently for our time to arrive.
45 minutes later, and nearly a half hour past our scheduled meeting time, he was still in conversation and still hadn't given us any indication that he would be done any time soon. At this point, we were pissed, so we stood up and walked right in front of him and straight out the door.
While we were disappointed we didn't get a chance to pitch this firm, it felt damn good to walk out on that disrespectful a-hole.
Lesson: An investor would never accept this level of disrespect from a entrepreneur, and neither should you.