Sometimes people crack me up.
Lately, some of the companies I’ve been advising have been receiving “term sheets” from angel investors who are looking to take an active role in their company. These term sheets turn out to not be term sheets at all – they are contracts. And they yell loudly “I, the investor, win on all terms and on all counts.” These documents are not well intentioned and seem to be meant to play on the entrepreneur’s inexperience and desperation for money. I’ve seen some lately that provide terms (which I will attempt to de-obfuscate) such as:
The rip chord: “I will invest my own time and money, but if I can raise money on your behalf then I don’t really have to invest money myself. Oh, and I don’t really have to invest my time either.” Purpose: To take a big part of your company and see if it goes anywhere without necessarily having to commit any time or money.
The “it’s not my fault” clause: “I am the CEO and I can make any decision. However, I’m not really technically the CEO and you agree to hold me harmless for the decisions that I make, even if I run your company into the ground.”
The equal founder clause: “I am equal to all the founders. I have equal capitalization, and I can never have less equity than any other founder at any time in the future. This is true because you must assume that I am a God-like CEO who really can sell your company for millions in six months (like I promise to you but don’t write down anywhere) and even though I had nothing to do with your progress to this point, the idea, or the team you’ve assembled.”
The “I pay no taxes” clause – “You will cover the taxes on my capital gains which you are too naive to realize potentially makes me much more than an “equal founder” that I previously forced you to agree to.
What cracks me up is that this is never going to work. This “investor” has a strategy of finding companies with solid products but lacking in experience or the ability to go to market. He probably does have to ability to deliver some capital through his connections. But any entrepreneur who will ever make it in this world will surely consult his more experienced advisors. So the only remaining candidates for this ploy are stupid entrepreneurs with bad (or no) advisors, right?
A note to Entrepreneurs – Get good advisors in various disciplines who have verifiably done things that impress you. Your best advisors cover all of your weaknesses. Then use them before you make any major moves. Doing this one thing can save you a great deal of agony.
