An 'Investor' Destroyed My Startup
I spent a little over a year and $20,000 of my own capital building a FinTech software. It demonstrated a lot of interest and potential (E.g. a $5 B company was reviewing our product prior to launch to be a client) , but rather wrapping it up and getting revenue to raise money from Tier 1/2 VCs, I had an offer from an investor to put in $1 M at an unattractive valuation.
Myself thinking, 'I don't care about the valuation, I just want to get the money in to accelerate', I accepted - despite being in various stages of due diligence with three investors. After several months of negotiations and many calls a legal agreement was formed... The important lesson here is the 'hidden valuation', that is, in the value of the quality of your investor.
Usually when an investor signs a term sheet, the money comes through relatively quickly and things accelerate, but week after week, and excuse after excuse the money never came in. During this period, having expected the money to come in, I hired my top developers full-time and am now stuck with those expenses - unable to comfortably afford it.
Now, I'm stuck with a rouge 'investor' owning 50% of my company without putting in any a dime, close to $10,000 in bills, and a software I poured a year of my life into and made many sacrifices for. At this point, if I were to raise more money, I would have less than 20% of my company on the first fundraising round (assuming giving a real investor 20 - 25%).
Despite this, the people you have on your cap table and relationships between them can send most top investors 'running for the hills', they don't like drama and founders with little equity - as it decreases motivation and means they can't negotiate attractive valuations for themselves. As much as I would like to admit - this is almost certainly game over.
Had I conducted even slight due diligence, this could have been solved. If I had held out longer and got a little traction, I could have appealed to Tier 1/2 VCs, rather than risk doing business with an unknown entity.
I should also note, I have a background in PE/VC myself, I'm not a fresh entrepreneur either. It's easy to be blinded by logic when someone offers you capital for investment. As a note to all people intending to raise capital - don't be blinded low hanging fruit because it's often, but not always - toxic.