Ask HN: How To Avoid Getting Screwed By An Investor?

More important - if you don't feel you can trust this guy - then you should not do business with him. Simple - perhaps not logical - but gut feelings matter a lot.

1. Perform your own due diligence. Just like investorscheck companies, you should check your investors. Talk to other companies he's invested in. Ask him for references. If he's reluctant to introduce you to other startups he's worked with, that's a big red flag.

2. Have a valuation in mind. 4-5% can be great depending on how much he's putting on the table. If it's hard to think in those terms, think if someone gave you $1M today, how much equity would you be willing to give in exchange? Reverse engineer that to the 4-5% he's offering you and see if that's worth the value he's offering.

3. THIS IS VERY IMPORTANT. A corollary of the previous point. Do not go into your next meeting without a valuation in mind. Investors might offer different versions of a deal and you'll need that value as reference otherwise you will get screwed.

4. Forget NDAs. Never disclose your secret sauce until the cash is in the bank. I don't know what stage you're at but investors will typically ask for references, financial statements (if you have any), metrics (if you have a product), business plan, and maybe an overview of the most relevant business challenges. Anything beyond that (especially if it's too technical) is a red flag.

5. Act as a partner. Be alert but don't assume the investor is trying to screw you up. Make sure you like to work with that person because you will have to for the coming years, and if the relationship is not good it can be a nightmare.

6. Find YOUR lawyer and don't sign anything just yet. Go look for an attorney who's done this in the past. They can be your best ally. Don't hire the attorney that a potential investor might try to recommend. Find YOUR guy. You don't have to do it before your next meeting but don't sign anything just yet. If the investor is in a rush, that's another red flag (or a great argument for you to negotiate better terms).

Hope this helps. Good luck!

PS. In my opinion equity for development is a bad deal. Go find a developer that will be involved in strategic decisions going forward. That adds long term value. A development company solves your short term problem but in a few months you'll still need an employee and you won't have money to pay him.

But as the other commenters have noted (including the dead guy): do not sign an NDA to talk with an investor. NDAs should not be part of the investment relationship. If they are, the fundamental trust necessary for a working relationship is absent and nothing good will come of it.

Second point is that the new owner's shares should vest over time with specific milestones - such as half for the cash and half for the completed app. Some sort of clawback related to the performance of the application might be a good idea.

My gut tells me that this sounds a little too good to be true - 4% for cash makes sense. Throwing in the programming doesn't seem justified, the NDA is also problematic when the person proposing it hasn't brought anything to the table which has an economic value associated with its disclosure.

The final point is that unless you are looking to bring on a partner, this is a distraction. If you have runway and are hitting your targets, you don't need necessarily need a partner. Then again, if you require one it is better to negotiate before you are near the end of your runway.

Good luck.