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Fake investors: How to spot scammers and time-wasters, and protect your startup

Published: Oct 19, 2023

As criminals invent new ways to launder cash, or obtain money or shares fraudulently, startups need to stay vigilant. Unfortunately, many founders encounter potential investors who aren’t who they appear to be.

In this post, we cover the best ways to avoid potential scammers, fraudsters and time-wasters, and hear the stories of founders who’ve encountered them.

Build your network and get references

By the time you start to raise a funding round, it’s likely you’ve already built up a strong network of industry peers and experts. Ask your network, advisors, mentors and team members to recommend potential investors. Word-of-mouth recommendations are likely to be far better prospects than someone who sends you an unsolicited message.

Attend events for startups such as pitch sessions, conferences and networking nights to meet potential investors. When you meet in person, you can gain valuable insights into an investor’s character which aren’t as easy to pick up on when you only communicate via email or video call. Networking is a skill that takes practice – the more practice you get, the more you’ll hone your instincts for spotting a great potential investor.

The time-waster in Brazil
We’re listed on a site for finding investors and via the site, we were contacted by a potential investor in Brazil. He was friendly and enthusiastic on video calls, and keen to see our documents, have a demo and so on. Just like any normal investor.
We were in touch regularly and he wanted to put in £300K – over half our round! But when we sent the Term Sheet, the messages dried up. He’d send excuses about being busy but by then, we’d realised he was a time-waster and we’d moved on to focus our efforts on finding genuine investors.

Communicate openly

When you have an interested potential investor, encourage open and transparent discussion with them. Ask about their expectations, how much they want to be involved in your startup, and the role they see for themselves.

Make sure your values and vision align with those of the investor. Even if the investor is bona fide, misaligned values can lead to conflicts in future.

Trust your instincts

If something doesn’t feel right, don’t ignore the warning signs. Maybe there’s something about a potential investor’s behaviour that makes you suspicious or uncomfortable. Talk about what’s happening with your co-founder or co-worker – if they feel similar, then it’s a red flag.

Learn to trust your instincts and intuition. You already know what to avoid in terms of payment frauds, identity theft and bogus charities – apply the same principles to investors. Classic red flags are investors who try to rush you to make decisions, pressure you into unfavourable terms or avoid giving clear answers to your questions.

The famous investor imposter
We already had some money committed for our £500K pre-seed raise when the representative of an apparently well-known Thai investor got in touch. We met the ‘investor’ on a video call and after he told us about the sectors he invests in, he wanted to sign the term sheet and commit half the round. We were astounded.
But the guy didn’t put his camera on. He said his lawyers had told him not to show his face. We were suspicious but worried we were ignorant about foreign practices.

Carry out thorough due diligence

Due diligence is an important step in your fundraising but it can be easy to overlook when you’re excited about a deal.

Just as you’d ask for references for a potential employee, ask your investor for the details of several referees: entrepreneurs they’ve worked with previously. Get in touch with the referees to ask about the investor’s attitude, behaviour and values.

The non-paying time-wasters
We’re a cross-border fintech so our investors are an eclectic mix from diverse countries. We’ve had two instances recently with dodgy investors.
Firstly, a VC in India signed with us but never came through with the money. Then a syndicate committed to funding us, and again the money never appeared. We don’t believe these people are simply disorganised – instinct tells us they’re frauds.

Rely on professional help

As well as using a service like Themis for due diligence checks, you might need other professional help to navigate your fundraising deals.

At SeedLegals, you can complete your deals entirely online by yourself with our automated legal documents. But many founders chose us because our support team is on hand to help. While we can’t do due diligence for you, we’ve guided thousands of startups through their rounds and one-off investments. We review your Term Sheet and legal documents, identify red flags and, for more complex funding rounds, our Advisory service can help you negotiate the best deal for your company.

Protect your startup with the correct legal documents

Doing your raise on SeedLegals? You and your investors will sign a Shareholders Agreement. This sets out the rights and duties of shareholders. If you issue shares to an investor without signing a Shareholders Agreement, you could run into unresolvable conflict in future.

What to do if an investor doesn’t send their money

When you sign SeedLegals documents for your fundraising, if an investor signs but doesn’t pay, terms in the documents allow you to cancel the agreement. And on our platform, you’ll need to confirm the investor’s cash is in your account before you can issue shares to them.