Discuss: A Singapore investor is offering startups unfair terms. How can founders respond?

It has come to my attention that one accredited mentor partner (AMP) under the SG Founder program is offering stakes in companies that come with very unfair full ratchet terms. For example, investors accept 3 percent now but stipulate that in all the rounds up to either X million raised or Y million valuation, it gets to maintain its full 3 percent without putting up money.

This is a terribly wrong practice and is usually used only for companies in very weak financial positions. And to compound things, in this deal, the AMP wasn’t even going to add any cash to the US$22,000 (or S$30,000) grant from the government!

To the startup founders who encounter such conditions, please realize that it’s a terrible deal and not normal at all. The norm is to take ordinary or preference shares or issue a convertible note with a discount. So, shop around with other AMPs and you can get better terms.

Some responses to the issue

At some level, this is a buyer beware issue. I think those who accept these terms without talking to people and learning about the market rate sort of deserve to be burned. You also know that startups are hard. There is a limit to how much you can protect founders. I appreciate what Lim Der Shing is trying to do, but I think the fundamental problem is that the government shouldn’t be funding those who are set out to fail. Those who succeed will succeed not because of the government, but in spite of it. —Ben Leong, associate professor at National University of Singapore

For the many startups who come to see us or AMPs, they are usually the university students, suaku (a Singapore slang for someone who is not well-informed) types who seriously don’t shop around. I spend usually a few sessions teaching them to be street smart before considering a grant. They deserve to be burned if they are suaku, but they are our next generation of Singaporeans. —Christopher Quek, managing partner at Tri5 Ventures

You can’t coddle the founders too much and for too long. If they are serious about starting businesses, they should invest the time and energy to understand these terms and do their due diligence on the investors. In this day and age, when so much information is out there, founders should be able to get a basic sense quite quickly with just a simple Google search. I’d almost say these AMPs and the suaku founders deserve each other? But good on Lim Der Shing to call them out as well. This is not OK and should be said as often as possible. —Kuo-Yi Lim, partner at Monk’s Hill Ventures

These responses have been edited from the original post on the author’s Facebook page. Read more from the author’s blog.

Let’s discuss:

1. Do you think founders should do more due diligence?
2. Have you encountered such terms when dealing with AMPs/mentors/accelerators?
3. What would you advise the parties involved in this case?

Share your thoughts in the comments section below.

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