Toxic Investor
Buying 35% - 50% of a startup at an early stage
An investor who demands a significant share in the business (35% - 40%) puts it at risk. If he wants to control a significant share of the company (50% or more) before entering the market, this is an alarming signal. This partnership model demotivates founders and negatively affects strategic decisions, limits scaling opportunities and scares off future investors.
Usually, at the initial stages, it is wiser to attract financing with an investor share of 10-15%, reducing it to 7% over time.
Refund requirement if startup fails
Venture capital is a risk. If an investor expects a refund even if the startup fails, then they do not share the risk. This approach contradicts the essence of venture investing. As a rule, such investors invest in very similar companies and often insist on including this clause in contracts.
This requirement creates additional financial pressure on the startup, since if problems arise, the company will be obliged to pay the investor, regardless of objective market conditions or external force majeure circumstances.
An investor who demands a significant share in the business (35% - 40%) puts it at risk. If he wants to control a significant share of the company (50% or more) before entering the market, this is an alarming signal. This partnership model demotivates founders and negatively affects strategic decisions, limits scaling opportunities and scares off future investors.
Usually, at the initial stages, it is wiser to attract financing with an investor share of 10-15%, reducing it to 7% over time.
Refund requirement if startup fails
Venture capital is a risk. If an investor expects a refund even if the startup fails, then they do not share the risk. This approach contradicts the essence of venture investing. As a rule, such investors invest in very similar companies and often insist on including this clause in contracts.
This requirement creates additional financial pressure on the startup, since if problems arise, the company will be obliged to pay the investor, regardless of objective market conditions or external force majeure circumstances.
Fixed Price Trap
The investor wants to pre-write in the contract the terms under which he will be able to buy additional shares, for example, in a year, at the same price at which he initially invested, even if the value of the startup increases three to five times during this time.
This scheme shifts the financial burden onto future investors, who will have to pay more for shares in subsequent rounds. This will limit the startup's opportunities: you will not be able to attract new investments at a fair market price.
Excessive control
Toxic investors try to control the startup's expenses and block decisions at the micro level, demanding detailed reports that are often different from what the startup provides to other investors, and spending resources on their preparation will create an additional burden on the business.
Such an investor often wants to be the only one, actively resists and does not allow other investors.
The investor wants to pre-write in the contract the terms under which he will be able to buy additional shares, for example, in a year, at the same price at which he initially invested, even if the value of the startup increases three to five times during this time.
This scheme shifts the financial burden onto future investors, who will have to pay more for shares in subsequent rounds. This will limit the startup's opportunities: you will not be able to attract new investments at a fair market price.
Excessive control
Toxic investors try to control the startup's expenses and block decisions at the micro level, demanding detailed reports that are often different from what the startup provides to other investors, and spending resources on their preparation will create an additional burden on the business.
Such an investor often wants to be the only one, actively resists and does not allow other investors.
A promising startup found itself on the verge of bankruptcy. And it is not the market or competitors that are to blame, but the investor and the toxic terms of the deal he offered. Have you ever seen this? In its practice, LLC "EIFOS HUB" often encounters a situation when the ill-considered actions of investors sharply slow down the development of a startup that was promising yesterday. The investor blocks risks, tries to impose his "experience", his "vision" of the market, delays key decisions. Unfavorable terms of cooperation become the beginning of the end.
How to recognize a toxic investor before he starts investing money? And under what conditions should you not start a partnership?
What partnership is better not to start?
A startup that is looking for money for its project often does not think about how it will “part” with its investors. However, this is exactly the point that should be taken into account when signing the first documents. You trust these people with the future of your company - so it is important to understand who you will be dealing with.
Formalize the concept of a “toxic investor” for yourself. Is it a person, a fund, or something else? It is important to understand where the funding will come from. Analyze where and what projects have already been invested in. Have these companies managed to grow or have they encountered problems?
There is one simple rule: the more money and people are involved in your business, the higher the likelihood of encountering those who pursue exclusively their own interests. The law of averages works here too. The more successful the company becomes, the more attention it attracts from investors, and the higher the likelihood of encountering a toxic investor who is only concerned with a quick payback. An investor who is not interested in the essence of the project, technology, and the product itself. This is the very signal that cannot be ignored.
How to recognize a toxic investor before he starts investing money? And under what conditions should you not start a partnership?
What partnership is better not to start?
A startup that is looking for money for its project often does not think about how it will “part” with its investors. However, this is exactly the point that should be taken into account when signing the first documents. You trust these people with the future of your company - so it is important to understand who you will be dealing with.
Formalize the concept of a “toxic investor” for yourself. Is it a person, a fund, or something else? It is important to understand where the funding will come from. Analyze where and what projects have already been invested in. Have these companies managed to grow or have they encountered problems?
There is one simple rule: the more money and people are involved in your business, the higher the likelihood of encountering those who pursue exclusively their own interests. The law of averages works here too. The more successful the company becomes, the more attention it attracts from investors, and the higher the likelihood of encountering a toxic investor who is only concerned with a quick payback. An investor who is not interested in the essence of the project, technology, and the product itself. This is the very signal that cannot be ignored.
LLC "EIFOS HUB" recommends
Every startup initially has more than a dozen potential reasons for failure, and a toxic investor can add a few more to this list.
Every startup initially has more than a dozen potential reasons for failure, and a toxic investor can add a few more to this list.
- Clearly formulate for yourself the concept of a "toxic investor"
- Conduct a detailed analysis of the investor
- Ask the right questions
- Assess long-term risks
- Engage experts
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