Unfair Incubators and Accelerators
Incubators and accelerators often request a fixed chunk of equity from the companies who participate in their programs. The organization then provides services such as office space, supplies, access to the Internet, equipment (like printers, copiers and fax machines), mentors and educational programs. I’ve seen these percentages range from 5% to as much as 20%.
During the bootstrapping stage, any equity allocation expressed as a fixed percent is not fair. This is because the future is unknowable. It’s impossible to know, for instance, how much of the incubator or accelerator’s services you will consume and how long you will consume them? Even in situations when the curriculum is set, it’s impossible to know all the other contributions that will be made by others in order to get to breakeven or Series A investment. Remember, in Slicing Pie, equity is allocated based on the relative fair market value of each person’s contributions. So, you will never know the final number until the pie has terminated at breakeven or Series A.
However, in spite of fixed equity splits being unfair, it may be unavoidable. If you’re not willing to accept the deal, you may not get access to the program.
It is very important in these cases to be clear about the timing of the percentage. X% today is very different than X% a year from now, or the time of an IPO. Unless the time is specified, the very existence of an agreement may block future rounds of investment. Future investors may not want to allocate 10% of the company in exchange for what they perceive as a small investment of services.
The most logical timing to allocate the percentage is at the same time as the first priced round of investment, usually Series A. It’s kind of like converting a convertible note but instead of a cash amount, you’re converting a percentage.
You should avoid allocating equity earlier because you may be inadvertently setting a premature valuation for your company.
Ideally, the accelerator or incubator would recognize the value of a fair equity splits and participate in the Pie. There are two ways this could be accomplished. The first way is to simply allocate 10% of the slices in your pie at the time the deal was made. For example, if your Pie had 500,000 slices would simply add on 50,000 slices for them. This is an okay solution, but there is a better one.
The best solution is for the incubator or accelerator to simply bill the startup for the services it consumes. A monthly bill might include rent, Internet access, education, snacks, mentors or whatever else the program offers. Upon receipt of the bill, the startup can either pay it and not use any equity at all, or not pay the bill in full or in part. The unpaid portion of the bill will convert to slices alongside everybody else. This will properly reflect the program’s involvement in the company without taking an unfair fixed split.
If you are involved in accelerator or incubator that asks for fixed split, please feel free to introduce them to the Slicing Pie model or to me. I would be happy to have a conversation with the program management to help them understand how it works so they can offer a fair solution to the participants!