The Hidden Cost Of Accelerators
By Kevin Vela
Accelerators are popping up all over the place. And I’m not sure that this is a good thing.
Typically, an accelerator provides a little cash for a little equity, and some guidance or advisory services for a little more equity. Some have structured classroom type models over a 2-3 month program term, others are more amorphic. I think that most founders can easily ascertain the costs of accelerators in terms of equity + time in exchange for cash + services. But there are often hidden costs which you need to be aware of. Here are a few to watch out for:
Many accelerators will bury right of first offer, or worse, anti-dilution language into their investment agreements. And usually it’s full-ratchet anti-dilution! A limited right of first offer is okay, but full-ratchet anti-dilution rights should be avoided as much as possible. The only exception I’m comfortable with is for very small friends and family raises.
Early-stage financings needs to grease the wheels for later rounds. No startup ever exits after an accelerator. There will likely be many more rounds of funding. Make that as easy as possible. Anti-dilution or other silly accelerator rights will at best obstruct, and at worst, destroy later rounds.
How to avoid this: make sure your attorney reviews and negotiates your accelerator program participation agreement.
Founders frequently tell me that the accelerator they signed up for was a waste of time. The biggest complaints I hear are: a) all they did was help me with my pitch deck, and b) there were no material investor introductions.
How to avoid this: do your due diligence on the accelerator. Ask for references and add an eject clause into your program participation agreement.
Some are constructed with a good dose of investor exuberance, which leads to hasty structure and little future planning. This issue may not appear early on, but it can be a real sore spot a year or two down the road when you need someone from the accelerator to sign a resolution or waiver form as part of a bigger round. I’ve seen this from accelerators with short lives.
How to avoid this: Limit subsequent rights, and put time limits on response times such that the right is deemed to be rejected if no one is checking firstname.lastname@example.org anymore.
Overall, I’m lukewarm on accelerators. I do not advise every client to accept every one that he or she may be accepted into. Some can provide tremendous value – TechStars and Y Combinator are at the top of the list. I also have found that clients really enjoy and get a lot out of industry-focused accelerators. So before you accept an invitation, make sure you do your homework on that accelerator, and make sure you review the investment and program participation agreements with your attorney to watch out for the issues above.