In 2016, ZEAL Investments (ZI) – the investment arm of ZEAL Network SE – funded its first start-up: The Free Postcode Lottery (FPL), an innovative online lottery business. The experience of our director James Oakes, who previously led a gambling startup himself and succeeded in raising over £20 million funding, was immensely valuable in providing an entrepreneurial perspective. However, in any investment there are still plenty of complications that you can run into. Here are the three main learnings that we came away with, relevant to both investors and start-ups seeking investment.

What’s the real risk?

Investing in a start-up is all about the relationship between investor and founder. It is much more than a business transaction, it is a vote of confidence in the entrepreneurial team and as an early investor, we want to be partners and contributors to the teams we invest in. We want to see them succeed because if they do, we do. One of our earliest lessons from the FPL deal is that proposing debt finance might send a signal that you are not looking for a genuine partnership.

The signaling difference between a debt finance deal and a pure equity deal is huge. Debt finance protects the downside for the investor in the event that things don’t work out whereas equity doesn’t have that protection. With equity, the investor is investing because they really believe in the potential of the start-up and the entrepreneurial team. This has the positive impact of aligning the interests of the investor and investee.

There will of course be times when investors will need to use debt finance, and convertible notes are a useful tool in very early-stage deals, but the advantages should be carefully weighed against the negative signalling effects. If investors get that judgement wrong for the sake of making themselves feel one percent better about the risk profile, they could run the risk of losing the deal entirely. Similarly, start-ups should beware of investors that send signals that they’re not looking for a true partnership.

You want the other side to have good lawyers

Both the investor and the start-up need good lawyers. There’s a big misperception that the side with the better lawyer will get the best deal, because they will be able to pull one over the other side. In practice, this is rubbish. It is crucial for both sides to have a great lawyer so that the right deal is struck quickly and painlessly. A bad lawyer in the mix only adds complexity, cost and can risk ruining the whole investment if contractual points are not explained well or understood. Good legal representation on both sides builds trust and makes sure the deal that you both want to do is the one that actually gets done.

Don’t give away too much

It doesn’t pay for investors to get greedy. They need to remember that investing in a start-up is a marathon and not a sprint – The success or failure of the business rests squarely on the founders’ shoulders. While it can be tempting to try and grab as much business control as possible at the beginning, it is very healthy for the motivation of the team to leave a meaningful share on the table and not limit their options from the get go. Start-ups should also resist the temptation to give away too much, too early.

ZI, for example, opted for a 10 per cent stake in FPL. We see big opportunities for growth and would have loved to have taken more, but it’s not our business. We agreed upon a small initial investment and signed on as a partner to provide strategic, data and general management support over and above any financial commitment. That way, FPL retains the ability to consider all options as the business grows and essentially, remains master of its own destiny. In the long-run this maximises the chance for FPL to be successful and both sides win.

Christine Thoma is the head of strategy at ZEAL Investments.