Be Careful Who You Deal With

As these markets continue their chaotic path downward, people's true colors come out. Some people show increasing amounts of fairness and consideration. Others will self-optimize and use every bit of leverage that they can get their hands on.

Two entrepreneur friends of mine recently had a very negative experience with an investor who has a reputation for being Machiavellian and it really, really has incensed me.  These slimy bottom suckers use the changing market conditions to test how low they can retrade an existing deal.  Here is the standard game plan for these kinds of assholes. When they sense a dramatic change in the market, they pull away their term sheet siting "policy" changes. However, instead of walking away from the deal, they mention in passing that they might reconsider under "different terms". If the entrepreneur bites, they know that they have leverage and they proceed to throw down absolutely egregious terms (multiple liquidation preference, half the original price, etc). If the entrepreneur bites on this, they know they really have them and continue to ratchet down the terms until things break and they back off.

Entrepreneurs who have a retrade occur, must first figure out how badly they need the money. If they can get the runway from expense cuts or manage to breakeven, then they should tell the investor to pound sand as soon as they mention "different terms". Remember, even if you get this round done, you will be stuck with this scum for years to come and any time things go the wrong way, they will use their leverage to take another pound of flesh. This falls into my category of "Life is too short to deal with Assholes". If you have to take the money, negotiate as hard as you can, realizing that they will continue the downward ratchet. Try to drag out discussions and aggressively start talking to any other possible sources, even if under the same terms (if you think they are decent people, at least the match won't burn twice).

Before dealing with someone, especially an investor, find out what their reputation is in ugly situations. Did they roll up their sleeves and help the CEO or did they use the situation for leverage to self-optimize. Animals don't change stripes so assume you will see more of the same with yourself.

If I wasn't concerned about libel issues, I would list a couple of these known predators (with details) such as the one pimping my friends. I can only hope that the Laws of Karma eventually return the favor...

Comments

[Artfldgr]

A very good post. My only experience with investors went this way. which has changed my behavior now that i ahve several more patentable technologies in the potential pipeline.

they basically took the idea, pretended to make one of those new breeder companies, and took a quarter mill from an investor they knew.

once things got going, they then decided to call me to the table and blackmail me for total control. it was an interesting day... because at that time i had a freind (we later parted company because i realized he was not an entry level kind of investment guy, he was a more rescue the failing business sort of guy. but he could deal).

he had them by the short and uglies for a short while... but of course, he took a share of things in case it would work out (but i would have rather given 5% to a 600lb gorrilla on my side, than controlling interest given to what was now a set of vipers).

ultimately, similar technology now is used by ny times, and many other sites. however their versions are much less robust and never fulfilled the major purpose which was to cross link internal inforamtion, software, and external information to create a natural way for people to navigate to the thigns they need. someone gives you a number, you put it in, you get everywhere that number comes up in internal and external domains. (this was before google). one context would be the software in the company that would work on such data, so that a person would contextually be able to act.

they bled the thing dry and i had no ability to do anything.

now i have the different problem of a socialist researcher who believes that his purpose is to find out answers and publish, but never actually do antyhing with what he finds... arrrggghhhhh...

i devellped new system for sifting through genetic data MUCH faster than they will be doing. i could do on a desktop what another company is getting 60,000 processors to accomplish. the parts are CHEAP, and hyper fast. i have purchased what i can.. but i can only go so far myself.

thanks to the doc here at the hospital, its languished for a year and a half and not gone to the researhc department here where they would patent and license (and where i get a third of it). a third ofsomething is better than all of nothing.

now i have teamed up with him on a new very cheap calibration system for pipettes. self calibrating in a lab costs more than 15 dollars each time. its a huge industry in which there isnt a best way method yet. i have the best way method.

i took time and built prototypes and such. i am waiting for him to do some of the chemistry stuff... but being a socialist, he dont care as he already has his little warm spot adn belives it will last forever.

niether of us want to start a company... the tools would allow for calibration between EVERY run, rather than monthly and a yearly external.

but how do you light a fire under people?

my baliwick is solving incredibly hard problems... thats why they seek me to answer questions, or see if i have answers for them.

so now i sit, and the partner doestn understand why i am reticent about certain things, because those things may diminish my leverage. he doesnt get that the place may decide to play hard ball with us given down times are coming, and he might see a differetn face. after all, he is a key researcher, i am not... he cant afford to be alienated, i can... he cant think tactically enough to navigate out of a paper bag. (he loves obama, and yet, cant tell that he makes enough money that he is actually pulling the lever on his own problems).

so here i sit... with tons of these thigns. they sit till i see someone else figures out what i did, see that they make a lot, get frustrated, then ride the emotional roller coaster As i have no capital, and my skills that enable me to produce are not conducive to dealing.

i have spend my whole career providing solutions for others on demand. mostly in software,... i have made otehrs a heck of a lot of money... (early in my career i helped design Avons automated distribution system)...

so thanks for a great article... maybe the freind that didnt get it may read it and understand.

creating solutions requires an abnormal level of perserverence. but the down side of that is that it makes you stick with people longer than you should.