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Ask HN: Accelerator wants up to 23% equity?

My startup has been approached by an accelerator with an unusual structure. The numbers I'm giving below aren't exact, but represent the general structure of the accelerator. 1. They admit a small cohort in which they give all startups ~$70,000 for 7% of their company. 2. After a few months they give half of the startups an additional $50,000 for 4%. 3. After a few more months they give two of the startups an additional $50,000 for 2%. 4. Finally, they give one company ~$150,000 for 10%. They then want you to raise a Round A after having given away ~23% of your company. They want you to raise with the VCs who fund this accelerator. Is this a typical accelerator structure? My cofounder and I think that the initial $70,000 for 7% would be enough to bring our product to market, but our contact at the accelerator disagrees. Does anyone have any experience with this kind of approach from an accelerator? Does this seem more or less preferable than what other accelerators offer?

patio11 12y ago
There are basically three accelerators which are widely regarded as value-adding: YC, 500 Startups, and Techstars. The field is otherwise littered with options which have yet to demonstrate value add and which offer terms which are not considered very competitive relative to the standard terms in the Valley. I have no dog in this fight and don't know anything about the particulars of your accelerator, but those terms strike me as somewhere between "Uncompetitive with your best options" and "Run screaming."
- UnsureThrowaway 12y ago
  >I have no dog in this fight and don't know anything about the particulars of your accelerator, but those terms strike me as somewhere between "Uncompetitive with your best options" and "Run screaming." That's the same impression we got. I was hoping to get an outside opinion. Our contact told us (straight-faced) that no software company could be started for $70,000 and I immediately thought of Bingo Card Creator. Thanks for your input Patrick.
  - patio11 12y ago
    BCC probably isn't the comparable you want if you're on the investment track. There exist many companies which can get enough proof points for a sizable seed round or A round on $70k (chiefly spent on living expenses of founders as they build product and attempt to get some evidence that it is useful and salable). YC's history is chock full of examples.
notahacker 12y ago
Are the startups allowed to decline the follow-on funding? Without that, run a mile If I was a year or so into a startup, had already taken on ~$170k in funding for ~15% of my startup, and shown enough traction to be judged the most promising startup, then I very much doubt that I'd either see ~$150k as either a fair valuation for another 10% of my startup or a useful amount of capital to raise. (Also, with the approximate numbers you've provided, it effectively represents a "down round" compared with the last tranche of funding which is an odd way to reward the best startup in the batch)
alain94040 12y ago
If steps 2-4 are optional, then you're fine. Step 1 is reasonable. Not great, but ok. If $70K would make a difference for you, such as allowing you to bring a product to market, then it's worth considering. If all steps are required (can be forced by the incubator), then say no. [source: I used to run an incubator that I believe provides value]
api 12y ago
Whether this is a good deal depends on many specifics, all of which revolve around how much risk the accelerator is taking. Do you (and/or the team if there is one) have a track record? Prototype? Product? Customers? Traction? Brand recognition? If you went through that and answered "yes" to more than one of those things, then 23% plus the other terms -- like investor lock-in -- seem onerous and excessive. I see people raise seed rounds for more money on the strength of team + idea with no product for less of a percentage than that. So if you're not just at pure idea stage, run away screaming with arms flailing in the air like you're running away from the monster in a cheesy 80s horror flick. Also, in business "unusual structure" always makes me skeptical, especially if it's complicated or has a bunch of restrictions hanging all over it like this one looks like it does. Outside the wonkier areas of finance, typically there is no value in the actual structure of a deal itself -- all the value is in what the deal is about. Complex deals usually mean someone feels screwed or you spend a lot of time wrangling the deal which takes away from the time you should be spending building something. General sense: run.
nivertech 12y ago
Is this for common or preferred stock?

patio11 12y ago

There are basically three accelerators which are widely regarded as value-adding: YC, 500 Startups, and Techstars. The field is otherwise littered with options which have yet to demonstrate value add and which offer terms which are not considered very competitive relative to the standard terms in the Valley. I have no dog in this fight and don't know anything about the particulars of your accelerator, but those terms strike me as somewhere between "Uncompetitive with your best options" and "Run screaming."

UnsureThrowaway 12y ago
>I have no dog in this fight and don't know anything about the particulars of your accelerator, but those terms strike me as somewhere between "Uncompetitive with your best options" and "Run screaming." That's the same impression we got. I was hoping to get an outside opinion. Our contact told us (straight-faced) that no software company could be started for $70,000 and I immediately thought of Bingo Card Creator. Thanks for your input Patrick.
- patio11 12y ago
  BCC probably isn't the comparable you want if you're on the investment track. There exist many companies which can get enough proof points for a sizable seed round or A round on $70k (chiefly spent on living expenses of founders as they build product and attempt to get some evidence that it is useful and salable). YC's history is chock full of examples.

notahacker 12y ago

Are the startups allowed to decline the follow-on funding? Without that, run a mile If I was a year or so into a startup, had already taken on ~$170k in funding for ~15% of my startup, and shown enough traction to be judged the most promising startup, then I very much doubt that I'd either see ~$150k as either a fair valuation for another 10% of my startup or a useful amount of capital to raise. (Also, with the approximate numbers you've provided, it effectively represents a "down round" compared with the last tranche of funding which is an odd way to reward the best startup in the batch)

alain94040 12y ago

If steps 2-4 are optional, then you're fine. Step 1 is reasonable. Not great, but ok. If $70K would make a difference for you, such as allowing you to bring a product to market, then it's worth considering. If all steps are required (can be forced by the incubator), then say no. [source: I used to run an incubator that I believe provides value]

api 12y ago

Whether this is a good deal depends on many specifics, all of which revolve around how much risk the accelerator is taking. Do you (and/or the team if there is one) have a track record? Prototype? Product? Customers? Traction? Brand recognition? If you went through that and answered "yes" to more than one of those things, then 23% plus the other terms -- like investor lock-in -- seem onerous and excessive. I see people raise seed rounds for more money on the strength of team + idea with no product for less of a percentage than that. So if you're not just at pure idea stage, run away screaming with arms flailing in the air like you're running away from the monster in a cheesy 80s horror flick. Also, in business "unusual structure" always makes me skeptical, especially if it's complicated or has a bunch of restrictions hanging all over it like this one looks like it does. Outside the wonkier areas of finance, typically there is no value in the actual structure of a deal itself -- all the value is in what the deal is about. Complex deals usually mean someone feels screwed or you spend a lot of time wrangling the deal which takes away from the time you should be spending building something. General sense: run.

nivertech 12y ago

Is this for common or preferred stock?