Some unwritten rules of early stage investing

For those new to early stage investing there are rules and there are unwritten rules. Here for your comment is my take on some unwritten rules. What do you think? Know any more to add?

Founders and Co-Founders

Raise money by first building a great business.

Help other founders – and learn from them too. They are the best source of advice.

You are not worth what your shares and company valuation say you are worth, as that value still needs to be delivered – so stick around and deliver. You may not sell down your shares unless it’s a very small amount in later rounds.

Invest essentially all of your own money and time before asking others for theirs. It’s harder for older folks with families, but extend well into your discomfort zone.

The founders who stick around are the ones delivering the value. Don’t think for a moment that you can sell your shares at investment round rates if you leave.

Over-communicate with investors, and don’t forget to thank them. Disclose everything, especially the bad stuff, at investment time.

Fight hard to land investors who are nice people.  Look after them and protect smaller investors’  interests in later rounds.

Make it easy for investors, after proving the value of the company, with an investment valuation that activates the investors to “invest now or miss out.”

 

All Investors

Support the company publicly by amplifying their messages. Any success is because of the founder and team, not you.

Be very careful about offering advice – only do so when it is actually wanted. Value the time of the founders, team and other investors.

Keep things simple so that the founders and the next round of investors are not scared off.

Give firm answers fast – decide quickly and then back up the verbal commitment every time.

Don’t play out of your capacity – if you don’t have the available funds to invest the required amount then step aside quickly.

Answer your emails very quickly and be ready to review and sign documents at any time. Do as much of your own legal work as you can, and use lawyers who are responsive.

Be very patient after investing – early stage investing is a five to ten year commitment no matter what was said at the beginning.

Watch out for FOMO (fear of missing out) driving your decisions. Do your own work to ensure it’s a great investment – don’t take someone else’s word for it.

 

Friends and Family Investors 

You have given your money away and will never see it again. If you get a return be very happy, surprised and say “I was only backing my relative or mate.”

You are supporting the family member or friend because of who they are, so provide no business advice or help unless explicitly asked for.

Sign everything you get handed without complaint. Read the contracts of course, but look only for the big stuff. It’s not your role to question specifics of deals or to hold up deal making.

Early Investors who can lead a round 

Try to make decisions quickly, and let founders know why you will not invest. Be easy work with, respond instantly and don’t be the person holding things up.

Share the offer, if asked, with other investors who also make decisions fast, are likely invest and who have a track record of writing large  cheques.

Make it easy on the founder by focussing conversations on the things that drive or destroy value, not on trying to catch them out with over-zealous due diligence.

Make sure the founders are getting solid legal advice from lawyers with experience in early stage investments. Keep deal terms simple so that legal fees are kept at a minimum, all parties can understand the deal and the next round is easier.

Step away in future rounds when you are out of your league.

Early investors who are, say, <10% of an investment round or under $25,000.

Make decisions fast based on limited information, and sign any bits of paper put in front of you quickly. That doesn’t mean you read the contracts and look for issues, but you don’t have the rights to negotiate the main terms on deals.