Getting involved with startups—whether you’re investing money or building a company—can be exciting but also risky. Scammers often target both investors and founders, so it’s important to know the warning signs and best practices. In this blog, we’ll share easy-to-follow steps and checklists to help you spot and avoid scams, whether you’re putting in capital or growing your own business.
Avoiding Scams as an Investor
1. Conduct Comprehensive Due Diligence
- Verify Credentials and Track Record
- Check the founders’ backgrounds: employment history, previous exits, any public legal issues.
- Look for independent sources (e.g., LinkedIn profiles, press mentions) to confirm experience and reputation.
- Assess the Business Model and Market Opportunity
- Do the unit economics make sense? (e.g., customer acquisition cost vs. lifetime value)
- Is the market sizeable and growing, or is it a niche with little room for expansion?
- Examine Financial Statements Closely
- Request audited or reviewed financials whenever possible.
- Watch for unusually high margins or inconsistent accounting practices.
2. Engage Your Network and Seek Expert Opinions
- Ask Fellow Investors and Advisors
- Have any seasoned angels, VCs, or domain experts seen this deal?
- Do they have reservations or prior knowledge of the founders’ reputation?
3. Look for Red Flags
- Pressure Tactics or Artificial Deadlines
- “Close by tomorrow to lock in this special rate” is a classic sales tactic. Legitimate startups will usually allow time for proper evaluation.
- If a founder discourages you from talking to others, treat it as a warning sign.
- Unusual Valuations
- Pre–revenue startups valuing themselves at tens of millions and then offering a bargain deal
- Compare with comparable deals in the same sector and stage.
4. Verify Legal and Regulatory Compliance
- Check Securities Filings
- For larger pre-series A or later rounds, confirm that the startup has filed the required forms
- In other jurisdictions, ask for proof of compliance with local securities regulations.
- Review IP Ownership and Agreements
- Ensure that any patents, trademarks, or proprietary technology are properly assigned to the company.
- Look for ongoing licensing or royalty obligations that might create hidden liabilities.
Draft Checklist for Investors
- Founder & Team Verification
- Confirm identities and backgrounds via LinkedIn, past projects, press coverage.
- Speak with at least two independent references.
- Financial Review
- Request audited or accountant-reviewed financial statements.
- Check burn rate, runway, and cap table for inconsistencies.
- Legal & Regulatory Compliance
- Verify securities filings (Form D, local equivalents).
- Confirm IP assignments and any existing contracts or licensing deals.
- Red Flag Scan
- Watch for opaque ownership structures.
- Note any high-pressure fundraising tactics.
- Cross-check proposed valuation against comparable deals.
- Network Validation
- Solicit feedback from at least two experienced investors or mentors.
- Use reputable investment platforms when possible.
Avoiding Scams as a Founder
1. Validate Potential Investors and Partners
- Research the Investor’s Background
- Look up their portfolio via Crunchbase, AngelList, or the VC’s website.
- Check for LinkedIn endorsements, press mentions, and past exits.
- Beware of Vanity Metrics
- A flashy website or a high-profile name doesn’t guarantee legitimacy.
- Cross-reference claimed affiliations with actual, third-party sources.
2. Protect Your Intellectual Property
- Use Non-Disclosure Agreements (NDAs) Wisely
- While you want to protect your IP, be cautious: overly restrictive NDAs can deter real investors.
- Include mutual confidentiality terms rather than one-way, founder-only protections.
- File Trademarks and Patents Early
- Even provisional patents or trademark applications signal seriousness.
- Establish a clear chain of title: ensure all co-founders have assigned IP rights to the entity.
3. Establish Clear Communication Protocols
- Be Wary of Too-Good-To-Be-True Offers
- “We’ll invest $1 million on the spot for a 1 % stake” is a red flag. Legitimate investors will ask questions, negotiate terms, and involve legal counsel.
4. Perform Basic Company Hygiene
- Have Standardized Documents
- Store clean, boilerplate versions of your term sheets, convertible notes, SAFE agreements, and board consents. Having these ready minimizes the risk of accidentally executing a fraudulent document.
Draft Checklist for Founders
- Investor/Partner Verification
- Research prospective investors’ portfolios and track records.
- Confirm digital presence (website, LinkedIn, press).
- Intellectual Property Protection
- File provisional patents or trademarks (if applicable).
- Use balanced NDAs for sensitive discussions.
- Service Provider Scrutiny
- Verify accelerator or incubator alumni outcomes.
- Check references for consultants asking for large retainers.
- Read online reviews and search for any negative press.
- Communication Protocols
- Use corporate email domains for all fundraising correspondence.
- Refuse unsolicited “guaranteed funding” offers without due process.
- Company Document Hygiene
- Maintain an up-to-date cap table in a trusted online tool.
- Keep board consents and meeting minutes organized and accessible.
Conclusion
Scams can happen to anyone—investors and founders alike. The best way to stay safe is to do your homework, talk to people you trust, and keep your processes clear and organized. Use the checklists above as a starting point for your own due diligence. As you gain experience and build relationships, you’ll become better at spotting red flags.
Most importantly, share your experiences—both wins and close calls—with others in the community. By talking openly about what you’ve learned, we can all strengthen the ecosystem and help each other grow.