Loading...
Answers
MenuWhat exactly happens when accelerated startup fails?
Hi, just got an offer from accelator for our idea/project accelaration and Im quite dumb about how things work in financial side of things. Will we owe them 20k pre-seed capital if in case something bad happens and we fail? How its usually handled? Thanks!
*its 15% equity deal
I know it depends HUGELY on terms, but how does it generally happen among accelerators?
Answers
I haven't seen a deal structured this way. Usually they get 6-10% equity I exchange for some small amount of money ( ~ $25k ) and tons of mentorship. 15% for $20k seems high ( you are valuing your company at $133k ) but there might be more to it.
Accelerators are great specially for unknown founders. It gives them a fair chance of connecting to the people that well connected founders have access to and really get a shot at proving themselves.
The accelerator should have access to great mentors, investors and previous successful founders. It should also be vested in the success of the company ( thus the equity ).
If you sell them equity for the $20k, you don't owe any money if you fail. They get equity ( in very favorable terms ). If your equity turns out to be worth nothing ( I.e your company closes ) it's a loss for them and you but you should owe any money.
Best of luck!
Hi, well this is extremely uncommon, or at least very uncommon in the realm of legitimate investors of any kind. The whole point of venture investing, which includes accelerators and incubators, is that it's high risk, and that it's totally unsecured investment. That's why we get a lot of equity for our money.
Now, there may be exceptions depending on the deal terms and structure, but it's something you would only do if there was a really big incentive to do so, like super low equity. But if I read this correctly, and you get 20K for 15% of the company, that's not nearly sweet enough to also be on the hook for returning the capital if you fail, which sadly is likely.
If you want to talk and go through the term sheet/docs, I'd be happy to setup a call to discuss more.
You *shouldn't* owe them an financial obligation if you fail, since the $20k is almost always invested by accelerator as equity and it would be highly unusual if an accelerator were providing debt. 15% equity is on the high side of today's accelerators so I would be sure that this is the best deal you feel you can get before accepting.
If the accelerator isn't already well-known with many classes of graduates, I would suggest doing your due diligence and talking with companies who have already graduated from this program about their experience.
15% is only reasonable if they have a good reputation, have specific value-add you think they'll bring to your company and you and your team are inexperienced and unproven.
Happy to talk with you in a quick call if you need further clarity.
Financial side of a start-up varies depending on the industry. Nobody can draw a similarity between two start-ups which have failed in terms of financial situation. I believe this link will provide you with sufficient guidance in the matters of financial side of things: https://www.svb.com/blogs/james-wilson/startup-shutdown-when-fails
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
Related Questions
-
How does one raise funds for a business subsidiary without selling ownership of the "brand" identity?
In my experience, every step you take to complicate your company's structure and ownership rights reduces the likelihood of investors providing your venture with seed funding. To attract seed funding, investors expect a single-minded laser focus on the entrepreneurs' assessment of his or her best path to validating their business and growing it into a very large business as quickly as possible. So the very idea that you are reliant or considering taking multiple paths to success is likely to act as a red flag for most experienced early-stage tech investors. Also, until there is significant traction achieved, an investor is expecting to own everything generated by the business. There are rare occasions where a particular asset, brand, domain or other component of the business can be spun-out (usually in the case where it's a distraction from the core business but there's inbound demand from a buyer), but when I say rare, I mean this happens so infrequently that it's not anything that should be reasonably expected in the course of planning. Speaking candidly, this entire strategy creates a perception (accurate or unfair) that you are undecided on a number of the key questions you need to be sure of before you have a good chance of raising seed funding. I'd be happy to talk to you about what you're doing and help provide some clarity based on what I hear. I encourage you to review my references as I have been helpful to many other Clarity members on these types of issues.Tom WilliamsTW
-
How much potential value does a startup need to have in order to attract VC funding?
Wow, sounds like you have an amazing profit margin. The key is GROWTH. Continuous and stable, with the ability to predict future growth. Therefore, your market niche is very important, to feed the growth curve within an order of magnitude and can't be too vague. As others have mentioned, investors look for a $100-200 million valuation potential, as well as the ability to morph or expand as needed. Contact me if you want to discuss more.Tom NoraTN
-
A VC/Angel I am negotiating with wants a clause whereby founders have to sell all vested shares if they leave in good terms. Is this normal?
NO, it's in no ways normal. In reading how you have framed the question, this investor sounds to be acting in bad faith and is also setting you up to fail by introducing terms that are not standard to how quality investors interact with their investee companies. It is however very standard to have a first right of refusal to purchase your shares should you wish to sell. But that is not at all what you have stated. Happy to talk through the particularities of your situation in a callTom WilliamsTW
-
What do you ideally need in place to raise Seed Funding? Will an idea and a good team get funded or do you need company with hundreds of customers?
When it comes to raising money you must remember that risk is a perception. Your job is to drain the risk! Below is a link to a resource I provide my investors. The 50 questions are specific to product design/development but the 15 categories are questions that apply to any industry. If you can answer these questions about your deal you will have gone a long way to "drain the risk" for your investors and get funded. http://www.jaredjoyce.com/freetreats/50questions.pdf Once you have answered the questions for your deal schedule a call with me and I can help you integrate the answers into your investor pitch.Jared JoyceJJ
-
What are the tax consequences for founders if the seed round investors take common stock instead of preferred?
There shouldn't be any tax consequences for the founders if you've made 83b elections--the election meant you paid tax already on the full value of the stock at the time of the election (presumably zero) even though it was subject to future forfeiture. If you sell newly-issued stock there should be no tax impact. If you sell your own common stock, you'd pay tax on the gain, but I doubt that is what you mean here. Of course, you should not take the free advice dispensed on Clarity and consult your own tax preparer--this is not tax advice.Ben SavageBS
the startups.com platform
Copyright © 2025 Startups.com. All rights reserved.
