Doing your homework before seeking an investor is absolutely number one priority. There are thousands, if not millions, of entrepreneurs that haven’t the slightest clue how to approach a deal. Here are some common mistakes I see entrepreneurs make when they’re talking to investors. Don’t say or do any of the following, and you’ll have a leg up on the competition for those investment dollars.

“This is a no fail deal”

Every investor is well aware of early stage investing risks, and all investors know there is no success guarantee with any company. Equity is  unsecured. Even if you are raising money for your company with convertible debt or a loan, there is always a chance of default. Your optimism, I’m sure, is what has pushed you through the riskiest stages of your business, but that investor needs to know you are not blind to the  consequences of reality.

Takeaway Lesson: All businesses stand a significant risk of failure. Acknowledge it.

“You will receive 40% ROI”

This one is pitched by entrepreneurs over and over again. I appreciate the fact you have done your financial projections, and you understand the expected return to your investors. However, this still signals to an investor you are new or immature in your understanding of raising  capital. Why? For one, this could potentially put you in a very negative legal obligation to give that exaction return on capital.

Takeaway Lesson: Never give a promise of return on investment.

“I will give you X amount of shares for X amount of dollars”

The vast majority of fundraising negotiations with investors are done behind closed doors, especially for a company that has yet to receive its first institutional round of financing. Leave the negotiating door open until you get to that point. It’s best to go into the negotiations with an idea of what you want, but please, keep this is in your head until you’re in the door. Investors also have a magic number in their head, and if you’re pitching your number up front many investors won’t even bother with you.

Takeaway Lesson: Everything is negotiable.

“You must sign an NDA, too many of my ideas have been stolen”

I completely understand what is going on out there in the entrepreneurial world. It is often survival of the stealthiest, and yes ideas get stolen. Unfortunately, ideas are not material possessions. Almost any attorney can break through a non disclosure agreement, so it doesn’t protect your ideas at the end of the day anyway. The only protection you have is to listen to your gut and form trusted relationships with those you disclose to. Now on the investor side, many talk to countless entrepreneurs every week. Any one of those ideas or business plans can easily cross competitor boundaries. If investors did sign NDA’s, it would be a legal nightmare.

Takeaway Lesson: Your gut is your only protection.

“Hi, my name is______. Here is my 50 page business plan and PowerPoint”

The majority of investors are bombarded with business plans and PowerPoint presentations, yet most of the investments they actually make are via personal referrals or  long standing relationships with an entrepreneur they know. When fundraising, business plans are always needed for the due diligence phase, mostly so your investor knows you did your homework. Up front, though, your business plan is for your use, to prepare your pitch. Presenting the formal plan comes later. The majority of your investors will want to get to know you long before they ask to see your business plan. And in fact, many investors will actually enjoy helping you build or rebuild your business plan over time, and may  suggest different distribution channels, go-to-market strategies, etc.

Takeaway Lesson: Have a business plan, but don’t pitch it upfront.

Final Thoughts on Fundraising

Even if you follow all the advice here, there is no guarantee of success. But there is one thing that helps increase success rates in this phase, and that is a well developed relationships with your investors. That means building trust, asking for guidance, active listening, etc. Building a solid relationship with investors is often a long term process that has to happen before any investment is made. The best advice I can offer in this category is that you should start building these relationships early. The best time is actually before you even start your business.

Also, consider what it’s like to be an investor. Put yourself in their shoes. Most investors are NOT backed by LP’s or institutional money. The majority of angel investors invest their own hard earned money, out of their own pockets. So don’t treat investors like a credit card application you found on the Internet.

Author Bio: Amanda Frazier is 26 year old serial entrepreneur, CEO of Plan to Start, and the Founder of a tech startup called Synergy Hub. You can get in touch with her on LinkedIn  or Twitter.

Let’s just say that six years ago, when you started your own company, your former employer sued you. And that two years ago you, had to sue a partner to get him out of the business.

If that’s true, and you’re the innocent victim, then even so, when talking to investors, be quiet about it. Don’t ever lie: When you are asked a specific question, tell the truth. Don’t ever hide it when it’s time for the details. But don’t bring it up first. No matter how well you explain it, it’s not going to make you look good.

Once, maybe, but twice? Well, maybe you had bad luck. Nevertheless, it looks bad.

I’ve posted similar stuff on this blog before, but it’s always nice when you get it straight from The New York Times. I just read Financing, With Strings Attached on NYTimes.com. My favorite line–I heard it first from Portland, Ore., venture capitalist David Chen — which I use a lot is “choose an investor like you choose a spouse.”

It seems obvious to me. Somebody puts money into your company, and that person has ownership; and you have a partner and, depending on how things go, a boss. At the very least, a partner. Doesn’t it seem that compatibility should be important? It does to me.

Author Dalia Fahey reports lots of anecdotal examples of strings attached by investors:

His complaint is echoed by other entrepreneurs. They tell of putting years into finding a business strategy that works and how their success attracts a professional investor. Then, while negotiating the terms of his involvement, the investor asks for changes. He might want to move a company’s headquarters or fire the chief financial officer. Or he might ask to replace one product line with another.

Especially in this weak economy, entrepreneurs may feel pressured to comply. And many times, complying is the smart thing to do because investors usually have more industry experience than the entrepreneurs they finance. Some entrepreneurs also cling to irrational ideas. But agreeing to such requests just because an investor offers cash is not always the best thing for the business, experts said.

Another reminder: Bootstrapping has its advantages.

And there is also the underlying obvious point. Plan well first, before it’s too late, to match the funds requirement to the opportunity. Some ventures need more investment than you can bootstrap. In that case, go into it with your eyes open, and be careful. Don’t just look for money; look for partners you can work with.

The idea keeps coming up: “How can I find investors who won’t take control?” And the variation on that theme, “Where do I find investors who won’t want to take a majority stake in my new business?

And that is basically wanting to go into business with stupid people. Not a good idea.

The question you should be asking is more along the lines of: Where and how can I find investors who will work with me as partners, listen to me and give me a hearing but tell me when they think I’m making a mistake, contribute to building my company, and be compatible with my life style and work style.

If you think I’m kidding, click here for the LinkedIn question and the answers to it.

Business owners face risks and compromises when they sell stock in their companies or accept outside investment. Tim Berry has post on this topic several times on his Up and Running and Planning Startups Stories blogs.

Reading Tim’s blogs, and watching the Yahoo! vs. Carl Icahn brouhaha reminded me of the novel Crytomonicon by Neal Stephenson. The story jumps between World War II and the present, and includes the search for hidden treasure, cryptography, high-tech startups, international business, venture capital investors, and the rights and claims of minority shareholders.

The bad guys are bad to the extreme, and I was pleased that the good guys win in the end. Of course, this is a work of fiction and the actions of the characters shouldn’t be viewed as archetypal (truth is, after all, stranger than fiction).

Still, I would recommend this book as a good read, and as a cautionary tale for entrepreneurs who are weighing the advantages and disadvantages of giving up total ownership for venture capital or shareholders.

Steve Lange
Senior Editor
Palo Alto Software