The startup scene has dramatically changed in recent years – with seemingly every up-and-coming city replete with networks of young companies eager to raise capital and grow. Some startups might still start in the dorm rooms of old, but the resources available to young companies today go far beyond the campus library.
Having more resources is, inarguably, a good thing, but it also means there’s a lot more to learn. One type of resource young companies should come to know is the startup accelerator, which can provide important business and legal counsel as young companies grow, and, sometimes, grow quickly.
Here are some key tips for startups that are considering joining an accelerator:
What are the benefits? Accelerators can offer valuable perks like workspace options, on-site legal counsel and structured programming to learn new skills. Sometimes they have established networks of clients and business partners. The perks may be valuable, but startups should work to understand the people they’re doing business with and ensure that their values are aligned.
Do your homework: Well-known accelerators can give companies a branding benefit, but that might not be enough if they don’t provide quality work. Companies should look into the accelerator’s reputation and history. Have they run into any litigation? Are there any concerning rumors about their work? Do they require the company to enter onerous agreements?
Look for success stories: With upward of 300 accelerator programs in the U.S., startups should evaluate an accelerator’s track record. Have other companies gone on to grow with the accelerator’s help? If multiple companies have graduated from an accelerator only to fall apart afterwards, it may not be an effective program.
Check the numbers: An accelerator may be counseling anywhere from a dozen to hundreds of companies at once. Make sure you would get the attention, resources and time you need, understanding that there’s a fine balance between size and quality.
What is the monetary cost? You have to spend money to make money, but it’s important for startups to not give up too much to be part of an accelerator. Many take between 5 percent and 7 percent of a startup’s equity, but some take much more. Is this cost of valuable equity worth the benefit? And some deals can jeopardize a startup’s ability to make money or sell equity later.
Consider the cost, beyond money: Joining an accelerator also costs valuable time that could be spent building the business. But if an accelerator expands your network or provides resources you otherwise couldn’t access, it might be preferable to going alone for a few months.
Know what you’re signing up for: Will the accelerator be hands-on when it comes to the work companies are producing? Or will it be more of a library of resources, there to offer capital, a second business opinion or other counsel when needed? Startups should thoroughly research accelerator programs they’re considering joining, as some may be better suited for particular industries. What are the exact deliverables you will receive and is it worth the time and equity they will demand?
And read the fine print: Startups should closely examine accelerator contracts before signing anything binding and consider bringing in legal counsel to wade through the paperwork. Founders need to understand if they’re giving up more than just equity. Some accelerators require board seats or observer rights, side letters or other covenants and rights. That isn’t necessarily a bad thing, but startups should ask themselves how these issues will affect their ability to do business in the future.
Receiving an offer to join an accelerator program can seem like a golden ticket, but startups need to take a step back and thoroughly evaluate the terms, benefits, costs and track records before diving in. Accelerators can be a great way to grow a young business – but it’s up to startup founders to determine if a particular accelerator is right for their company.
Other advice for startups seeking funding:
Michael Gray is a Partner at Neal, Gerber & Eisenberg in Chicago, where he counsels investors, companies, and executives in private equity and venture capital transactions, mergers, acquisitions, restructurings, executive compensation and general contract matters. Previously, Michael was an investor who sourced, evaluated and closed private equity and venture capital transactions and mentored management teams.