I’ve pitched to well over 100 investors. And, I’ve worked with dozens of investors as a CEO and a board member. I know what makes a good investor and, more importantly, I know what makes a bad investor.

The thing about a bad investor is you are stuck with the bad investor for maybe the next seven to ten years of your life. And the worst thing a bad investor can do is be so disruptive they can keep you from raising your next round of funding and destroy your company in the process.

I don’t want this to happen to you. So, I’m going share with you the five ways you can avoid a bad investor before you take their money.

Let’s start with the first one on the list…

1. Downright bad terms.

It was challenging when we raised our initial $12 million in funding. 63 investors passed on investing before the 64th, “Donald Ventures”, invested.

It took just three meetings for Donald Ventures to give us a term sheet. That, by the way, is really fast.

The problems began with the term sheet. I received it on Friday afternoon. The term sheet had an expiration date of Saturday afternoon. In other words, we had 24 hours to come to an agreement.

The terms were standard. However, the valuation was awful. Donald Ventures was asking for significantly more ownership than was standard.

I set up a meeting with “Raul”, the DV partner in charge of the deal for Saturday afternoon. I was confident that I would be able to get to a more reasonable valuation.

The first thing Raul said when he answered the phone was, “there is no negotiation on this term sheet!” I thought he was joking, but I was wrong.

No matter what I tried, Raul wouldn’t budge. He told me that I could either accept this term sheet with these terms, or he would move on.

Terms that are too skewed towards the investor are a sign that you might be working with a bad investor. I talked with our other investor, Gill, and I talked my advisor, Dave. They gave me the same advice: Take the deal which I did.

This brings me to the next thing to watch out for…

2. Changing terms at the last moment.

During its initial fundraising, one of the most successful companies I am working with, a company that is now worth well over $1 billion dollars, had its two initial investors change the terms of the investment at the very last moment. Nothing had changed in the company to warrant the change.

Worse yet, the company had already passed on another term sheet to accept this deal. Again, just like in my deal, the investors in “Ray’s” company were taking advantage of the situation to increase their ownership.

I asked Ray if he could go back to the other investors, and he said he couldn’t. Again, it was this deal with these terms or there wouldn’t be a company. Ray decided to accept the terms.

It almost came back to destroy Ray’s company during the next round of funding. One of the two existing investors refused to agree to the terms of the next round of funding.

The new investor gave Ray until midnight to get his existing investors to agree to the terms which were very fair. The investor wouldn’t answer his phone. Ray wouldn’t give up and at 11:50 PM, with just ten minutes to go, the existing investor agreed to the terms.

This leads to our next issue…

3. A tranche.

A tranche means that you don’t receive all your money at once. Of course, Donald Ventures put a tranche in the term sheet they gave us.

We would receive $6 million upfront. Then we would receive an additional $6 million if we “taped out” five chips within fifteen months of starting.

We completed the milestones in April, three months ahead of schedule, and there was no problem with DV giving us the next tranche.

What I didn’t realize was how at risk we were with a tranche. There was a vague clause in the terms of our initial deal which read something like, “the investors can withhold further investment if the business environment changes.”

In other words, if DV decided they didn’t want to invest the balance of the investment, despite us meeting the terms of the tranche, they could legally withhold the funding.

As the chairman of my company, the late Barry Cox, liked to say, “Welcome to the NFL!”

Needless to say, you do not want a tranche. Next let’s move to…

4. The investor refuses to take a board seat.

I guess I could have put this under the changing terms at the last moment, but this is so subtlety bad and scary that it deserves its own explanation. There are exceptions to this rule such as taking angel investments, but you want your large investors to take a board seat.

Let me explain why. About two weeks before we were going to close our funding, Raul informed me that he wasn’t going to take a seat on our board. Instead, he was going to give the DV board seat to an outsider.

Investors have a fiduciary responsibility to the company when they are acting in their capacity as board members. Now that was gone. Raul didn’t even have to pretend he was acting in our best interests.

Looking back, this should have been a screaming red flag that we were operating in the danger zone. This moves us to the final point on my list…

5. The investor is an idiot.

That seems obvious, doesn’t it. There are two flavors of idiot investors you’re likely to meet. The first is “the entrepreneur with that one good exit”.

The entrepreneur had a successful exit from their company. Now suddenly, because this entrepreneur struck lighting in a bottle, they think they are the world’s expert on building companies.

Now, suddenly they are telling you how to run your company in a way that can destroy your company.

The second one is “the idiot savant.” Every industry has someone in it like this where you wonder, “How did this person get into such an important role?”

Usually, they are associates that have worked their way up to partner in a fund. Many have no operating experience at all.

Somehow, someway, they’ve had a couple good exits to keep their jobs, but they are clueless about what you’re doing.

One final thought: Sometimes you have no other choice but to take money from a bad investor.

Most startups do not have multiple term sheets to choose from. In fact, most startups are unable to raise funding.

So, my advice, despite the pain that Raul and Donald Ventures caused me, is take the money, keep your head down and execute. A bad investor is not a death sentence.

Indeed, Ray’s company, as I pointed out earlier survived their bad investors to be valued at well over $1 billion. However, it easily could have gone the other way.

And that’s the message. Avoid these bad investors if you can. It’s worth it even if you give up more equity.