Saturday, August 3, 2019

Protect Your Intellectual Property from Serial Thieves Posing as Investors

You are an innovator with a brilliant mind. With years of hard and smart work you have developed an AI-based solution that you are ready to commercialize. But you do not have the capital to move forward with it. You realize you are at the mercy of outside investors. You contact a whole host of accredited venture capitalists and angel investors. Months pass by. No positive news. You are becoming impatient, perhaps somewhat disheartened. As desperation kicks in, you start to contact the so-called small investors from online lists. They are giving you big stories about their investment philosophies and portfolio companies, but without any verifiable track records.

You are so eager to get started that you are ready to sign up with the one with the sweetest talk and biggest promises. You know you are supposed to check them out (i.e., do some due diligence). Other than a handful of references listed on their site (perhaps developed elsewhere where English is the seventh most important language) you have nothing else to go by. After speaking to one of them, it did however don on you that those references could be fake. Yet, you are ready to take the plunge.    

Wait!

Within this particular investor group there are too many serial thieves waiting to steal your invention. Since these serial thieves are intellectually incapable of differentiating between a digital watch with a new alarm tone (wow!) and an AI-based solution that advances the cause of humanity, they will steal anything. But they are generally good at three things: serial lying (they tend to believe truth is for the devil), serial stealing (they will steal anything to satisfy and advance their greed) and running ponzi schemes (to keep some hard-nut clients quiet).

Of course, they primarily develop their business by stealing client contacts. Needless to say, some of those contacts do fall for these thieves’ flashy lifestyles, constant lies and pushy salesmanship, becoming future portfolio investors (a.k.a., victims) themselves. At one point, you will find out about it. Anyway, it doesn’t matter how well you know your investors, do not (share or) introduce your contacts to them; let it take its own natural course. Obviously, the contacts-turned-investors (or future investors) are outside the purview of this blog post (couldn’t care less!).

So, how do you protect yourself from these serial thieves? Here are some red flags and safeguards:

1. Check them out at the local BBB and Chamber of Commerce – Ignore the positives (could be cooked up as they often hunt as a pack) and zero in on the negative reviews/comments, even if the ratio is 10:1. Contact that one negative reviewer and find out what the underlying story is. If the investor does not subscribe to the local BBB or Chamber of Commerce, I would be very skeptical of their intentions (despite the BS you might get from them “Oh, that’s old-fashioned; nobody cares about them anymore, etc.”). The genuine ones will brag about their BBB/Commerce standing, etc.

2. Try to avoid the Key-man Insurance – Since it’s a start-up, the investor may insist on taking out a large (relative to the money being invested) key-man insurance on you. Try to avoid it, or at least defer it until the product (based on your concept) has been launched. If you have to do it, insist on having your spouse or parent as the co-beneficiary, preferably 60/40. If they continue to insist on their business entity being the sole beneficiary, I would be very skeptical of their intentions and consult a lawyer for legal safeguards. 

3. Initial IP Patent Filing must be in your name – Do not fall for a joint patent filing (with the business). If the relationship works out, you can always transfer it to the business for a substantial fee or equity option. Either way, it benefits the business. If the initial filing is in the business name only, the serial thieves will do everything possible to push you out or will create an intolerable atmosphere wherein you push yourself out. If they insist on their way, show them the highway and look elsewhere. This clause must be anchored in the first agreement itself. This is your primary protection.

4. You must be the CEO of the new corporation – If the whole business is going to be founded on your IP, you must be the CEO of the new company with total hiring authority – no two ways about it. In fact, the legitimate investors will insist on your stewardship. The serial thieves, on the other hand, might fuss about it. Starting out, if you are not in charge, despite what the serial thieves say, your innovation would be road-killed, just matter of time! Down the road, you can always step down, paving the way for a professional CEO, which is quite common. Again, this must be clearly laid out out, upfront.

5. Insist on your own Independent Office with long-term lease – This will give you more stability and independence. If you are forced to work out of a room inside of their offices, you will gradually lose ground and become their pawn. It’s a trick the serial thieves often play. If they think your IP is valuable, they must do everything possible to accommodate, nurture and promote your requirements. While the parent company would be responsible for all rents and utilities, the lease must be in your company’s name.

6. Insist on owning 51% shares of the new company – If you own 51%, you may not be pushed out easily. When you are dealing with a small investor, you are inherently in a high risk situation, thus requiring higher rewards. Similarly, do not allow them to place majority directors of their choosing on the board. Also, try to hire an independent CPA and Lawyer for your company; it’s not a question of bias, rather a question of transparent billing, meaning your company must not subsidize their other portfolio companies.   

7. Negotiate a sizable salary during the gestation period – Due to the high ownership percent, if they are unwilling to give you a salary, you must nonetheless negotiate a decent salary, at least, until the company becomes profitable (easily two to three years), post which you must be allowed to sell a certain percentage of your unrestricted shares every now and then on the open market, thereby enabling you to take care of your family expenditures. 

8. Insist on having the pre-negotiated capital locked in escrow – Since you are dealing with a small investor, it is imperative that you ask them to put up the entire capital in escrow, with a lawyer acting as the escrow agent. The lawyer will then disburse the working capital on a monthly basis. This is a critical test; while the legit investors will not have any issues with this, the serial thieves will invariably try to talk you out of it. If you succumb to their sweet talk, this is what will happen: Once the business is up and running, one sunny morning you will get a call for an emergency meeting where they will announce ‘we are out of money.’ And, there goes your dream. Now you have to get hold of an expensive lawyer to get yourself distanced from those serial thieves. Meanwhile, they will go around and tell the world (primarily your contacts that they managed to steal) how you have destroyed a huge sum of their extremely hard-earned (LOL) money without producing anything. Do not walk into this trap!

9. Do not outsource your IT or other important services to their overseas portfolio companies – Outsourcing IT services to a quality US-based portfolio company would be fine. But these serial thieves often set up some portfolio companies overseas, luring you to outsource some of your essential services, primarily IT, to them. In return, you will get very low quality products and services coupled with hefty bills. In no time, your working capital will dwindle, forcing you to sell a significant chunk of your shares back to them, just to stay afloat – and it will be difficult for you to get out of this cycle until the eventuality hits (‘we are out of money’). And, it’s all by design.

If you are dealing with a well-known/accredited venture capitalist, you are in safe hands. Your success is their success so they will stand by you through thick and thin. But if you have to deal with a small, unverifiable investor, do your due diligence. We know you are not greed-filled. When you succeed, the humanity progresses and we all succeed.

Do not let a low-life steal your dreams!

Disclaimer - The characters portrayed here are hypothetical in nature and any likeness to any individual or entity is strictly coincidental. The author is not offering this blog post as professional services advice in any shape, form or manner whatsoever. Every investor is different, so seek the advice of a competent professional, preferably an experienced attorney, before deciding on a non-accredited investor.

COPYRIGHTED MATERIAL

Thank you,

Sid Som MBA, MIM
President, Homequant, Inc.
homequant@gmail.com

Coming Soon...Sid's New Book:
Life, Logic and the Power of Nine (Branding)

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