When raising capital, you may come across a new investor. By new, I mean they have very limited to no experience in investing in startups. While it may be tempting to take their investment and get them to agree to very company friendly terms, it may come back to bite you. You do not want your relationship with an investor to be plagued by constant frustration and hard feelings.
While there is nothing inherently wrong with new investors, their lack of experience can cause you to spend a considerable amount of time answering their questions. I had a client who was going to take some pre-seed money from a new investor. After expressing my concerns about this investor based on the questions they were asking, my client wanted to proceed. After a term sheet was signed and the deal documents drafted, the investor got cold feet and backed out. This left my client indescribably frustrated as they spent a considerable amount of time finding this investor and answering their questions.
All investors will ask questions however, and any good founder will answer them as well as keeping investors updated at reasonable intervals. Most experienced investors understand you have a company to run and therefore do not need to be bogged down by sending them constant updates. However, with new investors, they may demand answers immediately or require constant updates. Failure to meet these demands can result in them becoming increasingly frustrated with your apparent “lack of communication”. In turn you will start to dread receiving any email, text, or phone call from them. It is just not healthy and distracts you from the business.
It is also not healthy for your startup if you have a new investor who feels they were “taken advantage of”. It may be easy to get a new investor to agree to very friendly company terms, but when more experienced investors come in later, the new investor will most likely catch on that they were not given a “fair deal”. The last thing you want is a scorned investor whose consent may be needed for important business transactions, or worse, who has a board seat.
New investors should not be ignored, but proceed with caution if you decide to take their investment. It could work out fine, or it could be a constant headache.