How not to be cheated by an investor?

How not to be cheated by an investor?

Stage one: protection against theft of an idea / innovation 

Before deciding where to invest, the company should check the investor. Conducting an environmental interview is free, as well as verifying the financial condition of many investors who publish their annual reports. Investor services can also be a useful source of information.

The company should first use a confidentiality agreement: NDA (Non-Disclosure Agrement) in all business contracts. The first meeting with the investor and discussing the business idea must not create a risk that the investor will take over the client’s idea and present it to another manager, larger company or even friend. The theft of ideas are not uncommon at all, and NDA contracts consulted with a lawyer are a way of protection.

Stage two: financial security

The business owner of the investment should not pay the investor any advance payments, neither for the preparation nor for starting the contract. The honest investor should agree to add the initial costs to the first loan tranche or to the final value of the investment set out in the contract. However, the client should remember that an investor with a strong negotiating position may require an initial contribution of a certain amount – usually 10-20%.

Stage three: signing the term-sheet

Term-sheet is a document in which the client and investor contain the most important business conditions of mutual cooperation. These conditions strictly apply to commercial transactions and the investor’s entry into the company, as well as the future legal and organizational position of the company after the transaction. This document also includes the investor’s exit rules from the business venture, including how to secure the interests of both the client and the investor.

Stage four: cooperation with the broker as an investment insurance specialist

In order not to be deceived by the investor, the client should cooperate with an investment broker which is an investment advisor. Advisor has a lot of knowledge how and what to invest in, as well as how to conclude investment agreements, including both preliminary and final agreements with the investor. It also guarantees the company the security of transactions with the investor and the guarantee that he will work in favor of his client. This is because the investment adviser must have liability insurance. This is important when deciding how to find an investor.

Stage five: signing the investment agreement

The signing of an investment agreement is a condition for establishing cooperation between the client and the investor. The investor has already signed many such contracts in the past and he is able to negotiate favorable conditions for him. In order not to be deceived, when preparing and verifying the points of the investment agreement the client should always use legal assistance. This applies for example cooperation with an investment advisor, insurance broker or law firm.