Scam-Adjacent Activity Founders Should Watch Out For

Are you an entrepreneur? Are you a founder?

That’s great. Just make sure you don’t also end up being a mark, because you’re already a target.

Scam-adjacent activity targeting entrepreneurs is a flourishing industry that pivots and adapts to changes in the market and growing founder sophistication. Outright scams are usually obvious: Paid advertising spots posing as organic PR opportunities; loan offers requiring upfront processing fees; unsolicited offshore quid-pro-quos from entities without so much as a proper email address; the list goes on.

But other, more subtle, activities that present themselves every day, flying under the radar, are equally treacherous to early-stage startups. This gray area is more difficult to discern–especially by vulnerable founders looking for anything that will give them an edge.

“Scam-adjacent” activity mines the seams of vulnerability for startups, such as access to capital, in-house expertise, and interest-aligned partnerships. Some activity intentionally exploits startups’ desperation and willingness to “try anything,” while other scenarios are simply really bad deals. The very thing that drives founders to succeed—unassailable optimism—is what can disarm them against these nefarious designs.

In my experience as a two-time founder, I have seen all of these in action, have succumbed to a few, and have been lucky enough to dodge others.

 

Capital-Raising Shortcuts

Pay-to-pitch schemes are the most common example in this category. Watch out for groups styling themselves as angel investor syndicates and promising the opportunity to pitch your business to dozens of highly targeted and motivated investors. The likely price tag: $5,000 to $20,000. The fee is camouflaged as the cost of support with a “due diligence” process.

Another model is a conference presenting as a private equity or venture capital “forum,” where founders willing to pay up to $10,000 for tickets can meet top-tier investors.

The flaw in these models is simple: The understanding that startups are cash-poor is baked into the relationship between startups and investors. A serious investor considering a capital outlay is aligned with a startup’s best interest and will not cripple it by charging the founder thousands of dollars. Imagine preparing to interview for an entry-level job. A company then tells you that they are going to charge you a few weeks of salary for the opportunity to interview—and that you have it pay it upfront. And that you still may not (and probably won’t) get the job. 

Sound reasonable? 

Exactly. 

Another capital-access scheme is the decoy investor: Someone who offers to make individual introductions for you, but wants to be paid–either a retainer on the front-end, finder’s fee on the back-end, or both. The problem is, this violates Securities and Exchange Commission regulations. Only a licensed securities broker can legally charge for procuring capital. And legitimate investors don’t usually take meetings that someone was financially compensated to set up. Friends or contacts should just make the intro—they’ll be paid in social capital.

Other approaches include pitch competitions that charge entry fees, funding sources who reveal prior to closing that the “investment” is really a loan, and investors who will only provide capital as a personal loan to the founder—which means they are collateralizing your personal assets; they’re not betting on the business.

 

Experience/Expertise Shortcuts

While startups need help, unfortunately there are no shortcuts, bootcamps, workshops, gurus, hacks, studios, training sessions or pitch-deck-building courses for sale that can deliver the promised land. There are certainly key learnings that can raise founders’ game, but they are free and open-sourced.

The secret is: there’s no secret.

Any camp or course charging hundreds, or even thousands, of dollars is at best providing second-rate information compared with what can be found on sites of top accelerators and funds. Check out Y-Combinator’s free startup library or startup school, First Round Capital’s Review blog, and Crunchbase’s roundup of winning pitch decks. 

These, among other resources, are broadly available. Similarly, avoid “startup studios” that provide “discounted” legal, accounting, web-design or other services in exchange for equity. The cost to you is steep: You’ll give up equity, and still end up paying them for services. Startup studios often camouflage this model with legitimate accelerators by adding a quasi-application process. But the tip-off is always when they ask you for money.

Instead, founders should consider applying for some of the myriad legitimate accelerator and incubator options. It’s the same concept, except cash flows to, rather than away from, the startup. Giants like Y-Combinator and 500 Startups only scratch the surface. Today, niche programs like Cedars-Sinai Digital Health Accelerator dominate the funding scene in many industries.

 

Inner-Circle Misalignment

Not all risks originate externally. Some, in fact, come from within your inner circle.

A particularly fraught area is building an advisory panel. Without question, founders need advisers to lend their senior-level expertise (unaffordable on a full-time basis), and to make introductions to suppliers, partners, clients or investors. And sometimes to lend credibility by association.

Like an investor, and unlike an employee, an adviser is often on stronger financial footing than the early-stage company itself. To align their interests properly with the startup’s, advisers tend to not seek out cash compensation. A solid adviser understands the stakes, shares the vision, and will take equity.

That being said, set your radar alerts for advisers with heavy credentials who want significant equity, but hint that introductions and active participation may not be forthcoming. On occasion, a retiring CEO or other accomplished individual will seek to collect stock from a number of different startups, hoping at least one of them strikes gold. But this doesn’t help the startup, which needs engaged advisers. A vesting schedule–similar to that for key employees–can preempt stock-oversharing with advisers who ultimately don’t pull their weight.

Partner contracts—particularly on issues of rights to work product—is another hot spot. Some partners, vendors and agencies try to retain ownership of rights to the intellectual property they create for startups, even though the startup pays them for the product. Unless you are openly doing a licensing deal, you should own what you pay for. But many unscrupulous vendors and consultants (web-design agencies, for instance) know that founders don’t always read the fine print.