Beware of scammers posing as investors to steal your money

One of the companies I advise was nearly scammed out of $7,000 by a team posing as angel investors offering to invest in their business. The scammers were very good, and their story plausible. This was not an email from the supposed widow of the Nigerian oil minister, though in the end, their fake fee scam worked the same way.

All founders need to beware of this fake investor scam. With so many new startups looking for funding, the problem is certain to grow worse.

The scam starts with an outreach from supposed investors that looks like this:

We are a group of high-net-worth investors in the UK looking for our first angel investment in an early-stage startup. If your startup is looking for capital, please email us your executive summary for review.

No typos, no bad English. It asks for an executive summary rather than a pitch deck, but we can chalk that up to being new to angel investing or being in the UK, where they talk funny anyway. It sounds plausible, especially to an inexperienced founder who doesn’t know that angel investors don’t pop up like this.

What startup founder isn’t always looking for capital? A group of investors with money ready to invest — hell yes. Sign us up!

With some healthy skepticism, the founders replied with a short elevator pitch and the latest pitch deck, the same as they would with any potential investor — no harm in seeing where it goes.

A few days later, they hear back from the “investors”.

Your Business Summary is in for the team’s review. I will put you directly in touch with our partner, who heads the Angel investment portfolio. He will provide you with further needful information and guide you through the closing process. In the meantime, here are our funding terms.

The terms were “convertible debt equity financing” of up to $1 million at 5% interest, all principal and interest to be paid at maturity in 3 years. I have no idea what convertible debt-equity financing is, but what they describe is a loan. If they meant a convertible note, there was no discussion of critical terms like valuation and discount, and the maturity is too long to make sense.

Could it really be that easy to get the entire pre-seed round funded at once? Sign us up!

The founders filled out an evaluation form to which the “investors” replied with the following:

We completed the evaluation today, and it was successful, but we cannot schedule a voting session for the issuance of our term sheet as we need to clarify the following:

In our evaluation form, you did not allocate any amount for the closing legal fees. We would cap the fees based on the recommended estimate of the accredited solicitor that will handle the closing process. Considering you are not based in the UK, the solicitor will not be able to work on contingencies as they require at least 50% of their fees to be paid as a retainer before they can commence work. We can agree to cap the fees at £10,000.

And here, ladies and gentlemen, we have the scam. They’re offering to hand you $1 million on fantastic terms, with the minor detail that you have to pay £5,000 ($7,000) upfront as a retainer for half the legal fees. How reasonable is that?

To make this even more plausible, it’s not unusual for the lead investor to require the startup to pay the investors’ legal fees. These are usually capped at something like $10,000, but in every deal, I’ve ever seen, the fees are taken out of the investment, not charged upfront.

The founders were smart and asked for a face-to-face meeting before agreeing to make any payments, to which the investors made some excuses about why they weren’t available now and would reach out later.

So, fortunately, no harm was done, but I want to make sure everyone is alert to these scammers targeting the startup community.

How to avoid getting scammed:

1. If it seems too good to be true, assume it is.

2. If you’re an unknown startup, nobody legit will reach out to offer you money. Sorry, it just doesn’t happen. Investors have plenty of deal flow. We don’t reach out to unknown startups without some sort of connection.

3. If you haven’t heard of the investor, they don’t have a website and don’t have a LinkedIn profile with lots of shared connections, assume they’re bogus. If they do have a profile, make sure it’s the same person and not an imposter. Ask for references at other companies they’ve invested in.

4. Assume any deal that makes no sense financially for the investor can’t be real. 3-year loan at 5% interest for a startup with no revenue yet? No way. To make up for the 90% of investments that fail, angels and VCs have to make 15x on their early-stage investments, not 15%.

5. If you think you’re taking advantage of chumps offering you such a great deal, you’re the chump. Notice how they claimed to be first-time investors outside the country. Are they stupid? Incompetent? Inexperienced? Nope. They’re liars trying to get you to think there’s a reason you’re getting such an insane deal.

6. They want to invest a lot, more than any other investor. Why? Because it makes the fees look tiny in comparison. Sure, you’re skeptical, but the upside is huge. Our brains are wired to make decisions based on risk-reward. Risking $7K for a $100K investment with a 90% chance it’s a scam? Nope. Risking $7K for a $1 million investment — hmmm, you may think that’s worth a shot. Don’t let the big number tempt you.

7. If this seems like too much work to be a scheme to steal $7,000, you think it must be legit. But once they get you on the hook and tell you the money is coming, they’ll string you along with more complications and one more fee to pay for before the funds can be wired. They’ll suck you dry one sip at a time.

8. There was no discussion of the company’s financials or valuation or any other type of diligence. That was a huge red flag — investors do not put in money without hearing the pitch and asking questions.

9. Always ask for an in-person (or zoom) meeting. You want to know who your investors are anyway. In this scam, it probably would have been obvious seeing or hearing them that these people were not who they claimed to be.

10. Always remember your investors are partners in your business. Even with legit investors, you have to be as comfortable with them as they are with you. Make sure potential investors are people you want to work with for the next 5 years. Interview them the same way you would interview a new employee.

11. If someone asks for fees upfront before making an investment, run away as fast as you can.

Lastly, if you’ve been targeted, tell the world. Publish the email chain, so other founders know exactly what to look out for.

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