Is this accelerator/incubator investment contract sus?
sus = suspect (for my millennials and above)
Before we begin, I have a quick ask to make. Will you forward this to 3 people you know who may find value from this newsletter? We’ve been hard at work creating content, and could use a little help getting it out there. We are grateful for your support thus far. Thank you!
Hey founders et al. In today’s edition, we explore accelerator offers as part of the fundraising process – and specifically, how to do your due diligence. We also highlight great attorneys and tools you can use as you navigate early fundraising for your early stage startup.
How to evaluate your accelerator’s/incubator’s offer
We at HeyCounsel love our investors and accelerator On Deck :). But money always comes with strings attached, and it’s important for founders to remain vigilant when deciding whether to accept money when it is extended. This can be especially challenging if offers have been hard to secure and the clock is ticking, making founders feel desperate to accept any capital they're offered.
We are all likely guilty of moving a bit too quickly when the stoke is high. My advice: when you get that offer you’ve been hoping for, take a deep breath and then go through your due diligence. As a start, here are 5 things to think about when you receive your offer:
Look out for major red flags. High-level, red flags are signs of an aggressive, non-founder-friendly investor. They include non-standard anti-dilution clauses, aggressive liquidation preferences (Participating Preferred Stock and any liquidation preference greater than 1x), non-standard Protective Rights, and cumulative dividends. Don’t know what any of this means? Here’s a helpful article.
Think proactively about your dilution. If you are very early on, you may be thinking more about the cash coming in the door than the equity going out. But it will soon become very clear that equity is your best friend that, once given away, could become your worst enemy. If you give away 5%–7% of your company to an accelerator or incubator for a small-ish check, know that you’ll need to be a bit more stingy in any pre-seed or seed rounds so that you aren’t totally diluted before your Series A.
Know why you are joining your accelerator/incubator. The primary benefit of choosing an accelerator program or an outside investor is the guidance and mentorship that comes along with the capital. If the accelerator/investor is too inexperienced, too busy, or simply unwilling to offer you added value through guidance, advice, introductions, or resources, then this probably isn’t the best offer for you. Accelerators and outside investors are able to demand more from founders in exchange for the money they are offering because of this added value. Without it, the offer is likely unfair.
Know what IS “standard.” There are a number of frequently used financing documents for early-stage fundraising (e.g., YC’s safe). If there are terms in your offer that you can’t find in comparable offers or form documents online, start asking questions. Talk to other founders and to the accelerator that made the offer. Understand the why and the implications of these terms.
Control rights beyond equity. It is common for investors to take a certain percentage of the startup’s equity (for accelerators, 5%–7% percent). But if your prospective investor/accelerator asks for board seats, side letters, or other similar rights early on, you might want to look around a bit more. At this stage, your investor should be betting on your founding team. They should have better things to do than exercise control over your company.
Check out the tools below for more reading, resources, and lawyers who can help you navigate your fundraising.
Tools and Resources
There are some excellent startup fundraising resources out there that founders may not know about. We are always adding to this list. See the full list of resources here.
Video time! The Contract Teardown podcast goes deep into the YC SAFE. They talk about identifying impostor SAFE agreements and determining “reasonableness” when advising a very young company. Check it out here.
Further reading: Want to learn about the main financing documents in addition to the SAFE? This overview explains the three major types of seed financing legal instruments (convertible notes, SAFEs, and preferred stock).
Have any resources you'd recommend to other founders? Please fill out this form.
Lawyer Spotlight
We love highlighting founder-friendly lawyers doing great work in startup spaces. Check out our database of founder-friendly firms and lawyers for previously highlighted lawyers.
Eric Broad and the entire Bowery Legal team come highly recommended from a startup in the healthcare technology space. Eric advised on company structure, fundraising, regulatory compliance, company policies, terms and conditions, and ongoing general advisory.
“Eric has been more than an assist to the entire creation of my company — he has been my teacher, my partner, my guide through the education and development process; capital raising, investors, investor introductions, etiquettes, and so many other things that are just irreplaceably above and beyond what any Attorney would do. I’ve had many counsel’s in my corner over the years of serial entrepreneurship, but Eric Broad is both the standard and my right hand.”
Reviewing founder profile: Healthcare marketplace, 1-9 employees.
Work done: Corporate formation, fundraising, regulatory compliance, commercial work.
Have you worked with a great lawyer you’d like to recommend to other founders? Fill out this form to spread the love!
Referral Program (yes, it’s real)
If you share this newsletter with 10 founders or lawyers, I will send you a 1 of 1 autographed picture of my dog, Dylan. Signed by her, with video proof. And I’ll take your word for it, just email me at heycounsel@substack.com.
Thanks for reading. Stay lawyerly.
Brian