In this article, Leepakshi Rajpal discusses how can an angel investor recover money from founders who took money fraudulently.
Introduction
This blog talks more about how can an angel investor recover money if he has invested in a start-up, and later on it comes to his cognizance that the company took investments through fraudulent means, then the angel investor is stuck.
Very often people are confused as to how does he recover his money and whether he can recover money in the very first place? The answer to this will be given on this blog. Apart from this, the blog also discusses who is an angel investor and why would a startup look for an angel investor in the market, and also whether an angel investor benefits from such investment or not?
Who is an Angel Investor?
Angel investors are usually those investors who usually invest in the small startups or entrepreneurs. They are either the ones within the family of the entrepreneurs or within the bracket of the kith and kin. Therefore he can be within the family or within the friends or through the contacts of the friends or family. The capital angel investors provide may be a one-time investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages. These investors are those which provide a one time investment so that the company or the startup can establish itself well in the market and once they invest, they not only take a huge amount of risk with them but also enable themselves to huge profits, if the company prospers or the startup in which they have invested prospers.
Angel Investors can be found through a variety of ways such as:-
- Entrepreneurs
- Lawyers and Accountants
- Angel List
- Angel Investor Networks
- Venture Capitalists
- Crowdfunding
- Another way is through LinkedIn
- Through Colleagues or Friends
What if the company or ask for investment through fraudulent means? Or for purposes which are not listed in the MOA or the AOA? What will the Angel Investor do and how will he recover his money if he wants to back out from the plan? These all issues are discussed further on the blog.
What an Angel Investor seeks in an Entrepreneur before Investing?
If you are an angel investor and looking for reasons as to why will you want to invest in any startup or entrepreneur is appended below. You must look for the following things in the entrepreneur or the startup:-
The quality, passion, commitment, and integrity of the founders
Which means that it intends to see what level of quality and passion does the founder has for its work. If the level of passion and commitment is more, the chances of investment become more.
The market opportunity being addressed and the potential for the company to become big
Which means that the angel investor has to see what kind of market opportunities are created by investing in the startup and therefore he looks into this matter and once he knows the kind of market opportunities available, he will also be able to determine the potential of the company to go a long way or the company that will be able to go a long way from its existence.
A clear thought of business plan and an early evidence of obtaining traction towards the plan
The angel investor searches for a clear thought process as to what the business will be and what the clear plan of action will be. It is important to look for because when the angel investor is investing, he should also know the purpose for which he is investing, and the meaning of investment he is looking for.
Interesting technology or Intellectual Property
In today’s time, if an angel investor is investing his hard earned money, he must look for something new in the company, because if he does not know what is new, the company will not go a long way because it does not have something intellectually new. Therefore, the angel investor will get a chance to think more times and will not invest.
An Appropriate Valuation with Reasonable Terms
The angel investor also looks for an appropriate valuation with reasonable terms which means that in what amount of time he will be able to gain how much and is that reasonable enough for him to earn profits.
The viability of raising additional rounds of Financing if progress is made
The angel investors looks for the viability of raising funds, which means that he sees that whether the profits that he gains is long run or short run, what will be the time period within which he will be assured of profits and after which his profits will dwindle or he will have to put in more money to make money. Therefore, if an angel investor invests he has to take into account all these factors and then invest.
How can an angel investor recover money from founders who took money fraudulently?
How do the angel investors recover the money when they realize that they are being cheated from the startup itself. The recovery option is really the most difficult when the investment has already been made and especially when the investment is of such a huge nature that the investment has been done in the beginning years itself. The process is as follows:-
The invested Money is High
This means that the money that he has invested in the startup is really really high and the initial valuation may create future failures. The higher the initial valuation, the greater the pressure to grow and the higher the likelihood of the failure.
The Angel Investor is Likely to Push the Initial Valuation Down so that they have a greater chance of gaining a final exit which will return the ROI needed
This means that the Angel investor acts in the capacity of the director and assumes the position of the director when he invests in the startup, he puts in a lot of money and when he does that, his risk of failure gets higher and higher with company being a startup and not able to make up in the market. Therefore in order to recover his money, what he does is that while he acts as a director and the initial valuation is brought down in his capacity of acting as a director. So, when he decreases the initial value, he tries to bring the money and gain back the money he has put in and thereby trying to recover the money he has put in. This will allow him to exit his way and recover the money back at the same time. Therefore, he is acting smart in his capacity of an Angel Investor as well as a Director.
Conditions which allow angel investors to replace the management when they are acting in their director’s capacity
They get the director’s capacity because they invest the most and thereby have the largest numbers of shares as well. They try to build in conditions that replace i.e. change the management itself so that putting down the value of the initial shares becomes easy and he is able to recover his profit soon and make an exit out of the startup. They also have this reason of replacement that the team fails to reach the target that the startup targets as a whole so a better management would allow them to have access over their invested money as well it might turn the startup from losses to gains.
The Real problem lies in the fact that the balance of risk and the reward is difficult
It is difficult to maintain the balance of risk and reward involved in the angel Investors investment. So when the angel investor invests, he invests taking into account the future and stability of the startup but if the startup shows him false accounts of growth he is left with no option other than recovering the money back that he had invested. If the startup exists low on the budget, then the loss would be to both the parties, the startup as well as the angel investor but between them also the loss would be much higher to be that of the angel investor because he will be unable to recover the amount that he had initially invested in. The entrepreneur must have put in a lot of effort and his team would have put in a lot of sweat but as compared to the cash loss that the angel investor would be facing, this loss will be negligible. Therefore it becomes important for the angel investor to recover the money in such circumstances.
Angel Groups in India
There are various groups in India who provide for the angel investment in the market. Early stage investment in India is $240 million (Economic Times August 2012).
- Bangalore Angels
- Chennai Angels
- Hyderabad Angels
- Indian Angel Network
- Kutchi Angels
- Mumbai Angels
- Pune Angels
- Seeders
- Super Angels
Can the Angel Investors Sue the Start-up If it Fails?
No, in India the investors cannot sue the founder of a startup if it fails, provided they have invested for equity and not a loan, but in the US, For example, I could sue you for the cost of my time it took to answer your question. Do I have any legal grounds on which to base my suit? Highly dubious. Would I win? Almost certainly not. But could I? Yes.
Similarly, under the circumstances you describe, there should be no legal grounds whatsoever on which to base a successful lawsuit. That said, if an investor has deep pockets, really hates you, and for some reason wants to destroy you, he could sue you personally…but then again, that would still be true whether or not he had invested in your startup.
(Believe it or not, I’m aware of a current case that is the exact opposite: the founder is suing the angel over the failed company. Why? For no legitimate reason at all…except that the angel had a publicized big exit from another company, and the founder got a shyster lawyer to bring a bogus suit on a contingency basis. As a result, the poor angel has already spent six figures defending herself from this extortion attempt. Ahh, the American legal system.
Conclusion
Now that we know about the risks that are involved in angel investing are you sure you want to be an angel investor? If yes, then you must consider the factors mentioned in the blog and look for growth in the startup specifically the intellectual property in the startup because it is one of the key factors for the growth of startups. Apart from this, if you find out that the startup is a fraud, do this and you will be happy after recovering your money. Act in the capacity of the director and you would be able to change the management and bring down the initial valuation too through which you will be able to recover your money.
Happy Investing
The post How can an angel investor recover money from founders who took money fraudulently appeared first on iPleaders.
Image may be NSFW.Clik here to view.