Over the last several years, startup accelerators have become an increasingly popular funding option for entrepreneurs. With more of these programs emerging, it can be overwhelming to determine whether these programs provide enough tangible value to be worth their price.
While there’s certainly no shortage of curated lists and databases of various hybrid mentorship/funding models, it can also be difficult to parse complex structures, hidden costs, and potential traps. In an effort to shed some light on the topic, below are a few quick thoughts to keep in mind when considering accelerators.
Why should you consider an accelerator program?
There’s 3 main reasons that may lead you to consider an accelerator program:
You need investment and don’t have immediate access to friends/family/angel money
You need startup guidance (basics of startup lingo, fundraising terminology, structures for setting KPIs/OKRs, etc.)
You need to build a network (other founders, angel investors, VCs, customers)
While accelerators aren’t the only way to get #2 and #3, they can provide a meaningful and worthwhile accelerant (as the name would suggest) in these areas. If you need #1, but do not need #2 or #3, you probably don’t need an accelerator. Though raising capital can be daunting, you most likely have a better path to raising the same amount through other means (or, better yet, generating it in revenue).
So what’s the deal with accelerators?
While we can discuss the intangible benefits of joining an accelerator, at the end of the day, committing to a program involves a financial transaction, and you should be sure you fully understand what it is.
What accelerators provide:
Cash investment, generally ranging from $20K to $150K (sometimes)
“In-kind services” such as AWS credits worth a certain $$ amount (usually)
What accelerators receive in return:
A promise of future equity %, often through a SAFE or convertible note structure (usually)
A fixed $$ fee rather than promised equity % (sometimes)
A portion of the investment amount clawed back as a “program fee” (sometimes)
Corporate innovation access, as some corporate-sponsored programs do not charge fees or take equity (rarely)
These structures are not always immediately obvious. For example, consider the clawback program fee mentioned above. In some cases, accelerators will invest a certain amount (e.g. $150,000) for a promised equity amount (e.g. 5%). On the surface, it appears that the founder is receiving $150,000 at an effective valuation/cap of $3 million. However, if this accelerator then charges the company a $50,000 “program fee”, then the company is really giving up 5% equity for only $100,000, making the effective valuation/cap $2 million. This difference does not necessarily make this a bad deal, but founders should make sure they understand how much cash they will really be getting and how much equity they are giving up.
How do you determine if you are getting a reasonable deal?
As far as the financials are concerned, whether a deal is “good” or not is highly subjective and dependent on the founder’s situation. If you are searching for some sort of benchmark of “in-market” accelerator terms, two of the most mainstream, publicly available structures are those of Y Combinator & Techstars.
An investment of $125K via post-money SAFE note in exchange for 7% equity (preferred shares to be issued at the next qualified financing)
An investment of $20K for the right to 6% equity (common shares to be issued at the next qualified financing)
An optional $100K convertible note at a $3M cap (preferred shares to be issued at the next qualified financing)
Any accelerator asking for more equity than YC or Techstars should raise serious eyebrows.
There is not much aggregated data on what “no equity” programs charge. Anecdotally, we have seen fees of approximately $2,000 to cover the costs of program operations, specifically virtual programs. If anyone has other information, please let us know.
Beyond the surface, you should be on the lookout for the following red flags:
>1x liquidation preferences
Severe anti-dilution provisions
Super pro rata rights
Complex structures including warrants
Unclear financial terms, and unclear responses to questions asked
Application fees (there should be none)
If you encounter any of the above, you should seek advice from trusted founders, investors, and potentially legal counsel before making any commitments. For a quick reference, the resources at the end of this post provide some more detail on warning signs and potential implications.
When evaluating the advantages and disadvantages of joining an accelerator program, be sure to ask the following questions:
Scope: What does the program itself entail? Is it individualized or one-size-fits all? What is the time commitment required? Keep in mind that programming-heavy accelerators can be super distracting, especially for founders who already have a product launched and set goals to achieve (rather than being earlier in the experimentation / early customer discovery journey).
Immediate financial cost: As noted above, how much will this actually cost you, in cash, equity, or both?
Future cost: What rights are you giving to accelerator investors that might impact future financings?
Founder references: What do founders who have gone through the program already have to say about it? Do at least 3 founder references.
As you are evaluating information, if you don’t have a founder/VC friend/startup lawyer to consult, lean on publicly available information (e.g. the YC/Techstars terms and the resources linked below). If you’d like a gut check, you are welcome to book an office hours session with us or reach out directly via email (geri@laconia.vc). Most importantly, remember that if things feel wrong, your instincts are probably right.
Additional Resources
Common Accelerator Terms You Need To Understand Before Signing (Accelerator Terms Sheet) (AngelPad)
Startup Accelerators: The Legal Terms (Silicon Hills Lawyer)
Startup Accelerator Anti-Dilution Provisions; The Fine Print (Silicon Hills Lawyer)