13 ms·
They thought they were joining an accelerator – instead they lost their startups
- _cs2017_ 2y agoThis article is absolute trash since it doesn't explain how the bankruptcy of the accelerator would change the amount of dilution the startups experience. Taking the information in the article at face value, the startups paid the accelerator (partially) with warrants. Those warrants have a fixed exercise price; the courts cannot change that. Whether those warrants are exercised by the accelerator or by the creditors, the dilution will be exactly the same. This is not at all affected by whether creditors bought the warrants for penny on the dollar or for a billion dollars. Maybe there's some reason why warrant owner matters. But the article makes no attempt to state or even hint at such a reason. I wish there was a way to blacklist domains from showing up on my Hacker News feed so I don't have to keep reading this type of junk journalism.
- hn_throwaway_99 2y agoWhy the diatribe? > Maybe there's some reason why warrant owner matters. It's a well understood fact by anyone in the startup world that it does matter, because future investors or acquirers care deeply about the structure of your cap table. Furthermore, the article gives an explicit example of this: > She had lined up a grant from a bank to help fund her offer, but it ultimately told her no because it was too risky for them to be involved with an unknown warrant holder on her cap table.
- sroussey 2y agoThat paragraph makes no sense. A bank is offering her a grant? And this grant was supposed to remove the warrant holder from the cap table, so why would they have a problem with that? And having some unknown warrant holder is the reason to shut down? I call BS.
- rvba 2y agoWhat is the business model of an "AI smart-matching tool for humanitarian aid"? Spunds like a word salad, or a weekend project for a developer that could be hosted for few bucks per month.
- b112 2y agoRead your comment and parent. The quote from the article doesn't explain why the warrant owner matters, and you suggest the cap table structure does, which makes sense. However, the structure has nothing to do with ownership of parts of that structure. Why would warrant ownership matter?
- llamaimperative 2y agoBecause as an investor in a company, you don’t want that company’s founders constantly distracted by a piece of shit investor who has a massive stake in their company. Pretty straightforward. Investors can create tons of havoc, and “bought equity from a bargain bin outside of a bonfire” is probably as good a warning sign as any.
- b112 2y agoThe size of the warrant is still the structure. In terms of investment, as the warrant is demonstratedly transferable, the investor ownership is always an unknown. This still sounds like structure(size and control of a single warrant) rather than who. The real issue seems to be any large warrant, that is, the uncertainty in the structure.
- _cs2017_ 2y agoSo your point is that a good investor should agree to a buyout offer but the bad investor doesn't? In other words, the original warrant holders (the accelerator) would have happily agreed to the founders buyout offer funded by the bank's grant? Why would they do that, if the whole point of an accelerator is to accumulate shares in the startups?
- binbag 2y agoTerrifying.
- hn_throwaway_99 2y agoWhat a psychopath. To anyone who may be in this kind of situation, trust your instincts and leave. It will not get better. You will find other, better opportunities elsewhere. Best lesson I ever learned was from a high level exec that had just started at the company where I worked. He quit in 2 weeks. Impressively, he did it without drama or really even causing bad will - he just told the CEO it wasn't a match, and that the longer he stayed the more detrimental it would be to both himself and the company. I wish I had followed his lead - I was too worried about what it would look like to leave a company so soon after joining.
- paulryanrogers 2y agoWhat was the truth? Really just bad fits or something more sinister?
- hn_throwaway_99 2y agoNot really something "sinister", but there was a level of chaos/shit-show that was orders of magnitude bigger than I had seen before, and I've worked for startups my whole career.
- dylan604 2y agoI once worked at a place where an employee started their first day at the start of the shift. They mumbled their way through it to lunch where they never returned. That's the shortest I've personally seen. Absolutely not a c-suite role or anything management related though.
- deleted 2y ago[deleted]
- Paul-Craft 2y agoI think you're the winner here. The shortest I've seen is someone who left after their first day.
- 2y ago
- iamleppert 2y agoAdd TechStars to the list of accelerators to be avoided at all costs. They make an investment in your company on terms they can claw back the money at any time. Most of these accelerators provide little to no value, in my experience. Unless you need to know what “product market fit” means. Hilarious.
- moralestapia 2y agoMost VCs add zero value aside from the money. Bootstrapping is always better, if you can do it, of course. Exhibit A: Naval Ravikant, the flagship SV investor, widely regarded to as "a wise man", just released a kind of crappy messaging app that flopped. Imagine having unlimited leverage, unlimited money, unlimited reputation, a huge audience already in place and still that not being enough to put out a competent product. Now imagine this guy asking for 20-30% of your company equity in exchange for "advice", lol.
- ldjkfkdsjnv 2y agoIf the advice was a slam dunk they would just start the company. There are too many factors for it to be useful, and they know that. Theres too much nuance
- MichaelZuo 2y agoI've seen this 'Naval' on Twitter, or now X, but there's hundreds of accounts with that shtick, catering to various groups, so it seems doubtful. Are you sure he was 'the flagship SV investor, widely regarded...' among serious SV folks? Or just among the peanut gallery?
- dtnewman 2y agoNo one gives away 20% of a company for advice. He gives them capital. Hopefully connections. And founders can take or leave the advice. Anyway, he is a successful entrepreneur having built AngelList. Sure, maybe he isn’t Midas, but a single failure in a startup doesn’t make someone an idiot. But assuming you are referring to AirChat, it seems too early to call it a failure anyway.
- CPLX 2y agoWhat a fucking mess. I got tons and tons of outreach from these guys for my company. It was pretty well written didn’t come off as overtly scammy unless you already know to run screaming from an accelerator or any other “investor” that wants you to give them money up front.
- emodendroket 2y agoIf you don't know that what are you doing trying to run a business?
- jltsiren 2y agoRunning a business is one of the most common things people do. The barrier of entry is lower than for most jobs. There are millions of entrepreneurs who are well below the average person in their ability to recognize and avoid scams, and scammers are well aware of that. And it doesn't help that businesses often don't have the same legal protections as employees and private individuals.
- CPLX 2y agoDo you know if lawyers should be paid up front? How about a newly hired employee, do they get a deposit to ensure they will show up on the first day? How about a landlord for your first office? If you make things and sell them to a store does the store pay up front? Can they return them to you if they don’t sell them? Can you get a refund on a hotel if you don’t stay there? How about a flight you don’t take, or a rental car you never pick up? And so on. The world is complicated. How did you learn all that stuff and when?
- ldjkfkdsjnv 2y agoA popular venture studio based out of NYC is like this. They take 60% of the equity from the start, and provide 1M in capital (which is decent amount). The narrative is that they provide significant guidance, follow on capital, etc. But in reality, none of their guidance or follow on capital comes through. For a first time founder its okay for a year, any longer and its really a financial disaster versus just working your way up the corporate ladder. People have no idea how few startups really cash out, and how hard it is when you start from low equity percentages/have bad terms. The horror stories usually dont arise until a startup is actually worth something and has a future. This is usually 2 years+ into the journey. I think the typical founders doing this are actually just people that want to say they own a company at dinner parties.
- CharlieDigital 2y ago> A popular venture studio based out of NYC is like this Sounds like Fractal. Supposedly, the value add is that they've already done the due diligence and market research on some product idea. They match a team (CEO + CTO) to the idea and provide the funding. Do not know of any well known companies to have come out of this model, but if they're still around, it must be generating some returns for it to be worthwhile.
- presidentender 2y agoFractal seems to have addressed the entire market they had identified. It doesn't appear that they're still recruiting founders. I was in their pipeline and interviewing potential business cofounders, but chose to go the traditional venture route - it didn't work out, but I don't think I'd have succeeded at the Fractal business either.
- ldjkfkdsjnv 2y agoThey stopped getting funded bc of a mix of interest rates and company underperformance
- paxys 2y ago
- TimJRobinson 2y agoI don't understand how they lost their startup though? Doesn't the accelerator only take a small percent?
- atherton33 2y ago"Startups also granted Newchip the right to buy $250,000 worth of shares in the company at a later date, but at their current valuation"
- jojobas 2y agoSo the company was essentially signed away even before the bankruptcy.
- atherton33 2y agoYup. The bankruptcy just transferred the right to exploit it from the mildly incompetent to expertly ruthless.
- irjustin 2y agoYeah this is a pretty bad and far far far from founder friendly.
- deleted 2y ago[deleted]
- Joel_Mckay 2y agoRule #14: "Never outsource economic control structures, or one may end up indentured" Sometimes one needs to admit they were conned, and start over... When people start out, no one tells them there is an ecosystem of legal-cons that target vulnerable small firms. Even this forum has users the constantly spam people with various funding scams. My condolences, some lessons can take a year or two to recover... =3
- Terr_ 2y agoThat reminds me of a book quote, about a semaphore transmission-line company as a kind of fantasy-version analogy for modern telecoms. > "[My father] was chairman of the original Grand Trunk Company. The clacks was his vision. Hell, he designed half of the mechanisms in the towers. And he got together with a group of other engineers, all serious men with slide rules, and they borrowed money and mortgaged their houses and built a local system and poured the money back in and started building the Trunk. There was a lot of money coming in; every city wanted to be in on it, everyone was going to be rich. [...] > Everything was going fine and suddenly he got this letter and there were meetings and they said he was lucky not to go to prison for, oh, I don't know, something complicated and legal. But the clacks was still making huge amounts. Can you understand that? Reacher Gilt and his gang acted friendly, oh yes, but they were buying up the mortgages and controlling banks and moving numbers around and they pulled the Grand Trunk out from under us like thieves. All they want to do is make money. They don't care about the Trunk. They'll run it into the ground and make more money by selling it." -- Going Postal by Terry Pratchett
- Joel_Mckay 2y agoI wish the mistakes I've seen over the years were fictional, as even the people I found disagreeable still deserved better treatment. Any CEO worth anything owns their mistakes, adapts, and mitigates future issues. Good luck out there =3
- LocalH 2y agoModern capitalism in a nutshell.
- ultrasaurus 2y ago> So she paid a $7,500 deposit and was all set to join Newchip when a founder friend told her to “never pay for introductions.” Hopefully everyone knows this here, but if you paid for an introduction it's a negative signal: just cold email. That being said, I'll make intros for only $6,500 and no warrants.
- pavel_lishin 2y agoDon't listen to this charlatan. For only $6,499 I'll introduce you to a chap who won't charge you a cent over $6,498 for an introduction.
- hedora 2y agoI charge as much as the second lowest bidder. Second lowest because sustainable value extraction is important to me.
- deleted 2y ago[deleted]
- oxcabe 2y agoWho pays for a full introduction nowadays, though? Hear me out - we are introducing a PaaS (Pitch as a Service) platform so that founders only pay for what VC is interested in listening. It's just $0.003/word, allowing you to optimize your introduction. It's also lazily evaluated: if someone gets bored with it, you get cut off from your introduction and just pay for what you said up to that point. We are offering discounts for the words "AI", "LLM", and "web3". Those are half the price.
- atherton33 2y agoOf note from the article: she complained and was refunded the money after being stood up for the meeting, but they never cancelled the contract she paid to sign that gave them the right to buy her out of her own company for pennies, so once it passed to bankruptcy the creditors still took her company.
- Paul-Craft 2y agoI might be having a brain fart right now, but I'd just about swear I've read a similar story before. Can anybody back me up, or am I just mistaken?
- grensley 2y agoAnybody else nodding along like... "mhm mhm Austin...makes sense..." "I wonder when the Florida scams are gonna start hitting?"
- replwoacause 2y agoI’m curious to know what you mean by this. Does Austin have a reputation for this kind of thing?
- grensley 2y agoRich people start hyping these places Eager eyed entrepreneurs follow And the sharks are just waiting
- sangnoir 2y agoAustin and Miami were supposed to be the new tech start-up hotspots after the great COVID WFH migration. The zeitgeist was the SF Bay area was played out for a multitude of reasons the departees were only too happy to blog about. Austin and Miami also have a bunch of investors without a background in tech - in all, lot's of new players in a high-growth area make it a target-rich environment for those lacking scruples.
- deleted 2y ago[deleted]
- deleted 2y ago[deleted]
- adapteva 2y agoYup, got an cold email from them. Marked it as spam and never heard from them again...
- deleted 2y ago[deleted]
- replwoacause 2y agoThe guy in charge of this sounds like a real piece of work.
- bitwize 2y ago> Newchip founder and CEO Andrew Ryan Name checks out.
- alexeichemenda 2y ago>"It was very sad to call it quits because getting the funding to make those units was the only hurdle before making serious progress,” Temple said. “If they connected me with investors like they said, I could have made my invention, gotten efficacy and would be shipping units right now. I really do believe that." It's unfortunate to see a founder believe that one accelerator would make or break their company. Typically an accelerator amplifies your existing trajectory - if you're a fast-growing company, you'll get more term sheets from investors than you know what to do with. If you're flat, they won't be attracting investors in any way. It's a founder's job to navigate this instead of relying on the accelerator to find $500k.
- JumpCrisscross 2y ago> Typically an accelerator amplifies your existing trajectory If only they had a word increasing velocity :)
- CalRobert 2y agoSome accelerators are targeted towards people who do not yet have companies. I can't say anything for or against them but I briefly participated in (and chose to leave) Carbon13, which aims to match people with a cofounder.
- thayne 2y agoIt seems like if you make a contract and a stock warrant is part of your side, and the other side doesn't keep their side of the deal (for example because they went bankrupt), then that warrant should be void, because the contract was breached.
- bawolff 2y agoI mean, maybe you shouldn't sell of the right to buy your company. The accelerator sounds scummy, but at the same time i can't help but wonder wtf the owners of these companies were doing. Did they just not read the contract? If you own a company i think you have a lot of responsibility for the shitty business deals you make. Its not like we are talking about some senior citizen hoodwinked into signing their home away.
- datascienced 2y agoEvery contract has some crap in for what seems like unlikely scenarios. If you can’t negotiate it out it is either that or the highway. If these startups could get YC funding they probably would have. So for some it is accept a possible imperfect contract or back to employment. Employment itself being full of contracts with crap clauses as well as common law itself having crap. Show me the perfect contract!
- bawolff 2y ago> If you can’t negotiate it out it is either that or the highway That is generally how contracts work. You get something and you give something in return. Nothing comes free. If the deal was better then "the highway", you have no cause to complain when the other side comes to collect their part. Especially for a sophisticated party like a company. Things are a little different for individuals like employees where the power imbalance is coercive. However when it comes to a company, as long as it wasn't outright fraud, i have very little sympathy that they are having buyers remorse over a bad deal.
- datascienced 2y agoWould have been nice for the bankruptcy company (what is the term… administrator? receiver?) to try to sell the portfolio of investments as-is to another VC. This may have both kept the startups alive and got them more $ overall for creditors. Maybe this would have been more doable in 2020!
- jwsteigerwalt 2y agoWhen is the auction? How can you bid?
- keepamovin 2y agoThe court has since ordered the company to auction off the warrants it held in more than 1,000 of the startups that went through the accelerator program. Why should the startups be punished? I think in this case the interests of startup ecosystem should out do those of creditors. Is there no protection for that?? Seems nond to gut startups when an accelerator failed, agains the entire purpose. Seems a great way to destroy economic value. Tho to be brutal a bag of startups is basically economic destruction anyway, on average as most of them fail...but I mean. In this case it's like precrime, they're killing them before they even have a chance. Not fair, not good!
- jmward01 2y agoSo the question to the experts here is, what should someone look out for as a potential founder or employee (early or late)? I've so far seen 0 upside from the three startups I have worked at and I am not likely to think of options as an incentive in the future. Is this the new norm? Are the days of equity as compensation dead (even for founders)?
- gnicholas 2y agoIt’s long been the advice (at least on HN) to assume the value of options are 0 if you are employee. You have no ability to control dilution as a mere employee, so in almost all cases they will be worth nothing. As a founder, you’re in control. Your equity is worth as much as you make it! But the more funding you need to take on, the more diluted you’ll be. Bootstrappers grow slower but remain in complete control, and can’t be screwed by rare events like this one (or more common dilutive events, which VCs may force on you).
- SoftTalker 2y ago> The court has since ordered the company to auction off the warrants it held in more than 1,000 of the startups that went through the accelerator program. I probably don't understand something but how will this possibly benefit creditors? Who is going to pay anything for warrants in startups (most of which will fail, since that's what happens to most startups)?
- SpicyLemonZest 2y agoThe article indicates that buyers of an initial tranche have included startups buying back their own warrants (as the headline one unsuccessfully attempted to find funds for) and VCs who make similar portfolio bets routinely.
- tschwimmer 2y agoI had the same question myself. The article notes that most of the first tranche of warrants went unpurchased which makes sense. However, the article also says that some of the portfolio went on to have an exit or raise later funding or something (the article mentions some company in Australia that seems to be a going concern, but they're claiming that the warrants are invalid). My take is that whoever is overseeing the portfolio has determined that the likely aggregate value of all the warrants > 0 so they are trying to sell them to recover something. In practice most of the warrants are indeed are worth 0 so it's actually not as a big of an issue as this is made out to be.
- theogravity 2y agoIt sounds like Newchip had warrants on lots of companies - did all these companies pay $7500, or is this only for seed-stage startups that need to get access to an investor network?
- pedalpete 2y agoSo is the technicality of a warrant vs a SAFE that lands these founders in this position? As a SAFE is an agreement for future equity, would it also be treated as a warrant in a bankruptcy? Why would NewChip decide on this structure vs the more common?
- LocalH 2y agoPerhaps Ryan thought he might make a windfall from any warrants that weren't purchased in bankruptcy. "But startups’ objections were made in vain when the court overruled them. A bankruptcy court’s goal is to oversee the selling of assets to settle debts. If there is money left over, it’s paid to shareholders. Ryan is the majority shareholder."
- tyroneBray 2y ago[flagged]
- rsynnott 2y ago> Ryan acknowledged to TechCrunch last year that his leadership style was based on “a military mindset.” In the General Ripper mode, by the sound of it.
- ac50hz 2y ago> It charged startups between a few thousand dollars and $18,000 to $20,000 for its training programs This was one of several red flags for me…
- mullingitover 2y ago> Ryan had asked the leaders of each department to read a book on how to help college volunteers be more passionate about volunteering, recalled one person who attended the meeting. Ryan asked two of the company’s leaders to lead the group in a discussion of the book. But many were confused by it and didn’t see how it applied to Newchip’s business. > “They were struggling with it. Andrew kept jumping in and interrupting them, and directly challenging them.” And finally, recalled the source, Ryan said, “This was a test for individuals that I’ve asked to do this today. I was going to fire one of you, based on whoever did the worst job.” > He then singled out one person, told the room the person was fired, and, this person recalled, Ryan then said, “I do stuff sometimes to see who’s loyal and to see who is going to do what I tell them to do. This was a test and you failed. You’re out.’” > After seeing Ryan fire this guy in front of the whole room, “I literally watched all of his direct reports sitting there saying to themselves, ‘I will never trust this man again,’” the source said. The industry really needs to do a better job of rooting these personality types out and ensuring they don't ever end up in positions of trust or authority. Weird how the people who are the most obsessed with loyalty and respect from their staff are universally the least deserving of it.