Almost everyone has gotten burned before. Getting taken advantage of sucks. Especially when you figure out what’s happened. The purpose of this post is to share some of my dumb decisions, to explain what I do today to help minimize bad choices and to tell entrepreneurs that it’s okay to say “No” to the wrong term sheet.
Most people get taken advantage of when they are vulnerable, desperate, or lacking self confidence. At this time we tend to dream of the end result and ignore the details that our intuition is picking up. The key to it all is to listen to your gut, which is screaming “This is too good to be true, don’t do this deal or trust this person!.”
I remember shopping for my first condo in Chicago. My budget was $250k and I was hoping to get more than a studio. I must have looked at every place in my price range and finally came across a two-flat that was in a good neighborhood and was a pretty decent size. It was new construction and I liked the look and layout. I met the builder and immediately realized he was a sleaze ball, the kind of guy who makes you want to take a shower after shaking his hand. It didn’t take long before I caught him lying about the smallest things. This set off my intuition, which told me to walk away, but I decided to ignore what my gut was telling me. Instead, I purchased the condo because I was desperate for square footage. I’ll spare you the details but I entered into a post-purchase nightmare where the builder was hiring people to finish the itemized list and wasn’t paying them, defaulting on taxes due (which are paid in arrears in Chicago) and much more….
Needless to say this is not the only time I did a bad deal. But as I reflect on my numerous dumb decisions I can highlight a few common themes:
- The counter party does something weird, such as telling small, insignificant, lies.
- My intuition told me to stay away from the deal, but I ignore it and go through with the deal anyway.
- I was desperate to get the deal done. I dismissed some facts and elected to believe the fairy tale the counter party had sold me. I simply wanted to close too badly.
- I’m forced to cope with the effects of my actions, which can often take a long time to resolve.
- Understand that taking money from an investor implies a 3-8yr partnership. Evaluate the investor with as much diligence as they are evaluating you.
- Remember that good relationships are build on some degree of transparency, a foundation of trust that is established before the parties enter into a deal.
- Listen to your intuition, if your gut is telling you something is wrong, don’t do the deal.
- Start fundraising early, don’t put yourself in a vulnerable position that makes you consider a bad deal.
- Don’t be afraid to say no to the wrong deal. I do realize that this could mean the death of a startup, but in my opinion it’s better to move on to the next thing rather than struggling through the next 3-8yrs with the wrong terms and/or the wrong people.
ps. What actually spurred the idea for this blog post was an OpEd that I read in the NY Times about Newt Ginrich. The post set off my intuition and bothered me all day, but I prefer to talk entrepreneurship and will leave you to make your own political decisions.