In last week’s post I talked about how to evaluate an angel group with my Letterman Top 10 list. Today’s headline covers #2 of that list (Do they actually have capital and a track record of investing their own personal funds) and is from a story I’ve told at several entrepreneurial events. Although most people would assume it’s a reference to the Bible story, it’s actually from working overseas in a previous life.

Years ago while working in a country that had heavy-handed currency laws, I always had to go to a bank or other government-sanctioned business to exchange money at a ridiculously unfavorable exchange rate. As is always the case in these locales, you could find some enterprising entrepreneur that would exchange your US dollars at a more favorable rate. For many that ventured to do this, the common ploy was to receive an envelope of what looked like a big wad of local currency. In reality there were some actual bills on the outside of the stack and newspaper that had been meticulously cut and placed in the middle to make it look like you were receiving actual money.

With angel investing now in vogue in the US there is a similar con game for startup companies raising money, with many organizations masquerading as angel groups or individual investors. Although it could as easily be described as the angel equivalent of the email scam from my good friend the Nigerian Prince.

Several years ago one of our portfolio companies was invited to present to one of these purported ‘angel’ groups. At the presentation, the founder was approached by several members of the group who claimed to be angel investors. In reality—and after getting their legal hooks into the company and extracting exorbitant fees—were nothing more than consultants that offered to help the company raise money.  At the time the Pasadena Angels invested-and many billable hours of legal time later—we were able to extricate these individuals from the company—although not until considerable damage and expense had been incurred. Unfortunately this is not an isolated instance and occurs frequently.

Aside from making entrepreneurs aware that this goes on, the best advice I can share is twofold. Before proceeding with someone or an organization that claims to be an angel (or any other type of) investor, do some due diligence on that investor. Through websites such as SoCalTech it’s easy to access the old press releases announcing that an angel group has invested in a particular company. Call these companies and ask the tough questions—including how much of the investors’ personal funds were contributed.  If you can’t find any companies, ask the investor for specific ones that you can speak with.

Lastly, the only agreements you should be signing with an investor are the typical investment documents that are prepared just prior to closing on your investment and the money going into the bank. If you’re asked to sign an agreement early in the process or long before an investor has done sufficient diligence, be wary and always seek the advice of a good lawyer. In all of the situations where we’ve had to undo the damage to a portfolio company caused by these unsavory individuals, it was because an unsuspecting company founder had signed one of these consultant’s agreements.

Tags: Angel Capital, Fundraising, Joe Platnick

This entry was posted on Tuesday, February 10th, 2009 at 8:24 pm and is filed under Fundraising, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.