Accelerator Anti-Dilution Terms

Scott Coates Technical product manager and software engineer

March 7th, 2013

A good friend of mine is considering a term sheet for an accelerator program. For pre-seed funding they'd be receiving $20k in exchange for 8%. It all sounds good to me but there is an anti-dilution clause which would result in the initial investors retaining the 8% up until the end of a round lead by a qualified financing investor (not an angel).

That sounds a little weird to me. I know several of you have been in accelerators. Have you experienced any terms like this? Is this typical? If this has been your experience, what was the end result? Any insight would be much appreciated.

Scott McIntyre MD@COventures.US; MD@NationalCommonwealthGroup.net; President@CfPA.org; Chair@Phabriq Development

March 7th, 2013

Well, depending on the level of support your friend will receive, what record of service, success and referrals the accelerator program can produce, and frankly, I'd ask to see/meet with a former incubator client who succeeded and ask that person the terms of their agreement. It's highly likely that any firm may craft different terms reflective of the risk they perceive in backing a venture. Equally important to them is the track record of the entrepreneur and the scalability of his idea. It's a process. But non-diluting is pretty preferred treatment. And rare, unless this is a charity case and they're just throwing money at it...or unless they're very greedy and think they've got a rube on the hook. I'll follow this thread and see what else comes up. Best of luck to your friend. Pitch many different investors before deciding on anything. With Crowdfunding, there's all kinds of money out there.

Richard Rosen Founder of FastCall --> #1 Phone Sales Productivity app in the Salesforce AppExchange

March 7th, 2013

8% for $20k is high. I see programs giving $50k for 8%. $20k will go really fast.

Curious how the community chimes in. This is a great topic.

James Bond CTO at SupplyBetter

March 7th, 2013

If my arithmetic is right, that's a $250K post-money valuation. I agree with Richard, $20K won't go very far. And the anti-dilution clause might kill any further angel investments; so that may be the last money they'll see, until (and unless) they can attract a VC (which generally requires that they've attained *substantial* traction). So the question is, what's in it for them? If they're convinced the accelerator program itself will provide a *lot* of value, then perhaps this is worth it. But just for the investment -- probably not.

David Albrecht -

March 7th, 2013

That's not standard at all. In AngelPad, we had a pro rata where the incubator could buy shares if we issued more to try to dilute them out, but that was more a protective provision than something like this. Get it taken out.

Rajit Marwah Co-Founder & CEO at Loop

March 7th, 2013

Congratulations to your friend for receiving a term sheet. The tech press has conditioned us that raising money is easy, while the reality for most is raising money at such a young stage is hard. Vast majority of startups don't get into YC or Angelpad. The primary value at this stage is external validation from a real investor. If they are a real investor with a network their primary value is helping you get to that next level with follow on fundraising. Quibbling over a point or two here is missing the big point. If you fail it's meaningless, if you're really successful you won't miss it.

Agree that like any savvy entrepreneur, your friend should attempt to get more capital and/or reduce the percentage. Depends on the team, idea, how long he has been at it. It's only a bad offer if he can get a materially better one. The market is efficient like that. What's your friend's BATNA - best alternative to no agreement? If he doesn't need the money then he can wait and shop around. If he really needs the capital there isn't much choice.

Terms wise I would advise your friend to keep it clean. If the investors want to be fully aligned with the founders, they should be right there as common with no special anti-dilution provisions. If they want preferred treatment then just do a convertible note with a cap so that they are guaranteed the 8% conversion to preferred and the associated rights if a qualifying financing is reached.

Kevin Stone CTO/Founder of Subblime

March 8th, 2013

Anti-dilution is surprisingly normal for accelerators until an institutional round.

Keep in mind that any decent accelerator is providing much more than capital, so their investment is always underpriced. Their capital is usually just a token investment compared to their equity grant.

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