Let’s mug a startup founder(thinkvitamin.com)
thinkvitamin.com
Let’s mug a startup founder
http://thinkvitamin.com/business/lets-mug-a-startup-founder/
79 comments
Thanks for jumping in to explain. I appreciate it's not always easy to take part in a discussion that's mostly focused on ripping you to bits (justifiably or not). I for one look forward to see how this evolves, rather than judging everything on the basis of what it looks like on day one. Actions speak louder than words.
Thanks swombat, I welcome constructive feedback, but have been a bit taken aback by the nature of some feedback, the best way to engage Entrepreneurs and investors outside of the tech community is to work with them and provide constructive feedback, I'll keep listening
It seems you are saying "we'd like to recoup cash from our companies, if possible, without forcing them into premature dividends or exits, and without diluting our equity." Yes?
Well, that is a preferred equity instrument, eg, "This bit gets paid before the common equity gets a dividend or distribution."
Preferreds generally have a stated "interest" rate, but payments are at management discretion (accruing to principal when not made) but there is no reason that can't be zero. They can also have maturity dates for repayment. Yes, it looks a lot like a loan, and that's sort of typical for this "junior to all other obligations / senior to other equity" layer of the capital structure. (And note that there could well be legal and tax differences between preferred and debt. I don't know how it complicates the documentation you're already doing with the loan and equity pieces. IANAL.)
The important difference for you is jargon. "Preferred equity" doesn't carry a suggestion of personal liability, it's equity with a return clearly tied to the venture's success, but ahead of the common. Your founders won't know the term, but any advisor they speak with should.
Described thus, I still don't know if I like your proposition, or what others should think of it, but I'm closer to understanding just what that proposition is.
Well, that is a preferred equity instrument, eg, "This bit gets paid before the common equity gets a dividend or distribution."
Preferreds generally have a stated "interest" rate, but payments are at management discretion (accruing to principal when not made) but there is no reason that can't be zero. They can also have maturity dates for repayment. Yes, it looks a lot like a loan, and that's sort of typical for this "junior to all other obligations / senior to other equity" layer of the capital structure. (And note that there could well be legal and tax differences between preferred and debt. I don't know how it complicates the documentation you're already doing with the loan and equity pieces. IANAL.)
The important difference for you is jargon. "Preferred equity" doesn't carry a suggestion of personal liability, it's equity with a return clearly tied to the venture's success, but ahead of the common. Your founders won't know the term, but any advisor they speak with should.
Described thus, I still don't know if I like your proposition, or what others should think of it, but I'm closer to understanding just what that proposition is.
Mark - the trouble with your accelerator is this: It's a deal that not even you would've taken when you first started.
To promote it as "Breathing life into tech startups" is irresponsible.
To promote it as "Breathing life into tech startups" is irresponsible.
[deleted]
As someone in the comments on the article pointed out, oxygenaccelerator.com is scraping the top link on Hacker News, so they're actually linking to this article on their homepage. Hilarious.
Screenshot: http://i.imgur.com/GCYCG.jpg
Screenshot: http://i.imgur.com/GCYCG.jpg
Ryan, I assure you that in the US, a typical startup founder cannot walk into the bank and leave with an unsecured $163,000 loan. Businesses with many multiples of that in top-line revenue can't get that loan without personal liability.
I probably agree that 6% PLUS a $32k (zero-interest) loan is not a good deal.
But I don't even think 6% for ~$20k is a good deal for funding.
I don't think the comparison you're making here is fair. Calling it a "mugging" is a bit over the top. The people who mug startups are consultants and do-nothing executive hires.
I probably agree that 6% PLUS a $32k (zero-interest) loan is not a good deal.
But I don't even think 6% for ~$20k is a good deal for funding.
I don't think the comparison you're making here is fair. Calling it a "mugging" is a bit over the top. The people who mug startups are consultants and do-nothing executive hires.
The typical lean web startup doesn't need £100,000 as seed funding. I mentioned our 0% equity loan because it demonstrates what a terrible deal this accelerator is offering.
Loans and lines of credit often don't require equity. They frequently do require you to put up your house. You cannot pull an interest-free loan, backed only by your corporation, off a tree. It is a real offering. It is not reasonable to call it a "mugging".
We agree on how valuable $32k of seed money (debt or equity) is worth. To wit: not much.
We agree on how expensive 6% of your company is worth. To wit: a deceptively large amount.
We agree that this seed program is probably not a good deal.
I just think there's a difference between "probably not worth it" and "bad virtually to the point of criminality", which is what the wording you used meant.
We agree on how valuable $32k of seed money (debt or equity) is worth. To wit: not much.
We agree on how expensive 6% of your company is worth. To wit: a deceptively large amount.
We agree that this seed program is probably not a good deal.
I just think there's a difference between "probably not worth it" and "bad virtually to the point of criminality", which is what the wording you used meant.
Mark, the guy behind this accelerator, sold his company for multiple millions. Are you suggesting he doesn't have the business experience to see this for the bad deal it is?
It is hard for me to argue this with you, because I agree that 6% is a steep price to pay for any favor, be it an interest-free unsecured loan or a $20k seed investment.
But that's a subjective point.
What's not subjective is that an interest-free unsecured loan for $32k USD IS a favor, not a mugging, and while I don't think it's worth 6%, or even 1%, it's not right for me to accuse the offerer of that loan of mendacity.
A question I'd put back to you:
Assume that there is no seed fund or accelerator program you can get to accept you, other than this one. Assume that you need the $32k; stipulate that you cannot, say, bootstrap or consult your way out of the first 6 months living expenses.
Would you advise someone not to start a company instead of accepting this deal?
But that's a subjective point.
What's not subjective is that an interest-free unsecured loan for $32k USD IS a favor, not a mugging, and while I don't think it's worth 6%, or even 1%, it's not right for me to accuse the offerer of that loan of mendacity.
A question I'd put back to you:
Assume that there is no seed fund or accelerator program you can get to accept you, other than this one. Assume that you need the $32k; stipulate that you cannot, say, bootstrap or consult your way out of the first 6 months living expenses.
Would you advise someone not to start a company instead of accepting this deal?
Your question highlights the fundamental problem. All the hype about acquisitions of young startups, funded by seed programs, has created some sort of widely held belief that you have to participate in an accelerator to launch a startup.
It's also causing investors to be more aggressive in pushing their money on startups, whether they need it or not. Inexperienced startup founders will mistake their fervor as an indication that they should take the money, instead of an indication that maybe their startup has real potential and they should be slower to give part of it away.
"Would you advise someone not to start a company instead of accepting this deal?"
That's a false dichotomy. There are plenty of companies (ours, 37signals, etc) that started without any funding at all. Then when we decided to raise funding (debt in our case), it was easy to get because we had real revenue and clear growth. It made sense for the bank to loan money to us because it could see we that we were going to pay it back.
Let's all stop spreading this bizarre myth that you have to take part in an accelerator to start a company.
It's also causing investors to be more aggressive in pushing their money on startups, whether they need it or not. Inexperienced startup founders will mistake their fervor as an indication that they should take the money, instead of an indication that maybe their startup has real potential and they should be slower to give part of it away.
"Would you advise someone not to start a company instead of accepting this deal?"
That's a false dichotomy. There are plenty of companies (ours, 37signals, etc) that started without any funding at all. Then when we decided to raise funding (debt in our case), it was easy to get because we had real revenue and clear growth. It made sense for the bank to loan money to us because it could see we that we were going to pay it back.
Let's all stop spreading this bizarre myth that you have to take part in an accelerator to start a company.
If you ask, you'll find that there are few on HN louder and more obnoxious about skipping external funding than me. We bootstrapped in 2005. Not getting funding: best thing that ever happened to us.
But it's one thing to have it in for all seed funding programs (I'm with you on that!) and another to call one specific one "muggers" because you particularly don't like their terms. At least, not with terms like these.
Finally, just out of curiosity: is your $162k debt financing secured solely with your corporation? You didn't have to provide any collateral, or any personal guarantees? Obviously: I don't think you could pull that off in the US. Unless your revenues are way higher than I assume they are (my current assumption is already pretty high).
But it's one thing to have it in for all seed funding programs (I'm with you on that!) and another to call one specific one "muggers" because you particularly don't like their terms. At least, not with terms like these.
Finally, just out of curiosity: is your $162k debt financing secured solely with your corporation? You didn't have to provide any collateral, or any personal guarantees? Obviously: I don't think you could pull that off in the US. Unless your revenues are way higher than I assume they are (my current assumption is already pretty high).
I'm having a hard time understanding why they want the money back if they're taking so much equity. If the company is at all successful the 6% equity will be worth wayyy more than £20,000. If the company fails they get nothing, not even the loan repayment.
I suppose it protects them against so-called "lifestyle businesses" that never have a big exit.
I suppose it protects them against so-called "lifestyle businesses" that never have a big exit.
Even with companies that have an exit, it might take years, during which the companies could well afford to pay back the money.
Supposedly it allows the money to be recycled back in to the fund. This might make sense if it was in the millions but as you said, it's a very small amount (in investment terms) so that argument seems strange.
Sometimes I wonder if the guys who are providing the hosting, logo, font and design services are the ones making the money, not the startup founders. Web startups can depend on many paid services to make a web app work, yet not sure if their own web app can make money at all.
If you want to make a good living with little risk, be a dev, a designer or something like that. Given that most startups fail, and of the ones that don't, most are only modestly successful, you'll probably be better off (from a purely economic standpoint) as a paid employee (or service provider) to a startup than as an entrepreneur starting one up. I think there's something magical (insane?) about doing your own startup.
Note: I don't have the hard data about this, but this seems to be the consensus (although those people never presented their data) and my anecdotal experience. Please, tell me if I'm wrong :)
Note: I don't have the hard data about this, but this seems to be the consensus (although those people never presented their data) and my anecdotal experience. Please, tell me if I'm wrong :)
Except the founder gets paid either way, and paid more than anyone else usually. If the business goes bust nobody takes his house, or his things - he just finds another job or starts another business with VC welfare.
I don't know if that's always true (at least, not for founders I want to work for). I worked at a startup where the founder totally ruined his personal credit, and was paid a small portion of what everyone else was making until well into profitability. I bought a beautiful house in a good neighborhood while working for him. He _still_ lives in a tiny rented condo.
If things work out, I'll walk away with enough to pay down some of my mortgage, and he'll be set for a life of luxury. But if things don't work out, then I still have a great house, and plenty of savings. He'll have no credit, and no savings.
It seems like a poor use of funding to pay the founder a great salary (i.e. more than key employees) at an early stage startup: before profitability, or even early into profitability.
If things work out, I'll walk away with enough to pay down some of my mortgage, and he'll be set for a life of luxury. But if things don't work out, then I still have a great house, and plenty of savings. He'll have no credit, and no savings.
It seems like a poor use of funding to pay the founder a great salary (i.e. more than key employees) at an early stage startup: before profitability, or even early into profitability.
I am surprised they managed to get the loan via the Small Firms Enterprise Loan Guarentee scheme. I don't know any web based business that has succeeded yet, most bank managers authorise the loan as the guarantor provided you have enough equity yet in experience lack little web experience and equity in a property.
I am citing from previous experience, when pitching a travel startup to a Natwest 'business' manager his response when I expressed a point about Expedia was.. "who are they?". Enough said.
I am citing from previous experience, when pitching a travel startup to a Natwest 'business' manager his response when I expressed a point about Expedia was.. "who are they?". Enough said.
We had the same experience with Natwest. Our events business was doing over £1m in revenue with them, for over three years - and they still turned us down. They seemed completely aware of a recurring revenue model. Insanely frustrating.
I just hopped on the web and Googled 'small business loan' and came across Lloyds. I filled out a random contact form and amazingly they got in touch. I had to prepare a traditional biz plan and present it. Because we bootstrapped the startup and revenues showed constant growth, and I was confident in my pitch, they got back to me next day and said they'd do it. Wasn't easy but it worked.
I just hopped on the web and Googled 'small business loan' and came across Lloyds. I filled out a random contact form and amazingly they got in touch. I had to prepare a traditional biz plan and present it. Because we bootstrapped the startup and revenues showed constant growth, and I was confident in my pitch, they got back to me next day and said they'd do it. Wasn't easy but it worked.
Congrats!
It does irritate me that the UK government bleat on about making business finance readily available then you end up face to face with the likes of Natwest!.
Reading articles about the startup program in Chile and the building of a tech hub in Portugal I do wonder what happened to the innovation in the UK business sector, if the Startup UK website was anything to go by it's gone.
It does irritate me that the UK government bleat on about making business finance readily available then you end up face to face with the likes of Natwest!.
Reading articles about the startup program in Chile and the building of a tech hub in Portugal I do wonder what happened to the innovation in the UK business sector, if the Startup UK website was anything to go by it's gone.
So let's say that the hit rate for follow-on investments for a TechStars company is somewhere close to 70% (that's fairly accurate). That doesn't necessarily represent success, but it's a start. Y Combinator is probably better than that. Now let's say that a "lesser" accelerator's hit rate is maybe half that. Still a 35% chance of some measure of success. Now maybe there's a 10% chance by going the pure bootstrap route, maybe less. So taking the money--and the guidance--in whatever form, makes you maybe three times more likely to be able to do what you love for a fairly extended period of time. Not to mention the fact that oftentimes the accelerator provides free or discounted services for being a cohort company. Good legal for a deep discount, legal office hours, design consults, dinners with VCs, etc.
I can't speak for what Oxygen is doing, or whether they're providing these services or not. But many accelerators that aren't called Y Combinator or TechStars are, and though there won't be as many successes to come out of those, there no doubt will be some. There may even be one or two who attend, learn a bit, fail, and then come back to apply at one of the big dogs later down the road.
I can't speak for what Oxygen is doing, or whether they're providing these services or not. But many accelerators that aren't called Y Combinator or TechStars are, and though there won't be as many successes to come out of those, there no doubt will be some. There may even be one or two who attend, learn a bit, fail, and then come back to apply at one of the big dogs later down the road.
The loan clause is tucked away under FAQs instead of next to the 20k amount on homepage. How convenient... pickup that bat timmy.. hit him square on his head... :)
Also, don't forget that if the company goes into liquidation, debt gets preference to equity holders when it comes to distributing assets. So for all the "trust me" rhetoric, it remains theoretically possible that the creditor (ie the "incubator") could call in the loan, and if the cash is not at hand, they could force the company into liquidation. They would then end up with title to any IP, contracts or any other company assets.
In the Indian startup I hear of a new incubator/accelerator every few month. Of course, they don't give any money and yes they want equity. Its the hottest scam it seems these days.
This is an european phenomenon. I remember reading about one seed fund in europe that took like 50% equity of your equity.
I don't get it, isn't the 6% basically the interest rate?
No, because if any of these startups make it big, it'll be 6% of a much larger amount (think $10,000,000+). $600,000 is a little more than the interest you'd pay on a $33,000 loan at 6% :)
It looks like we have raised some controversy and questions around the funding model we have chosen for Oxygen Accelerator. So this blog post is in response to some of the questions/points raised:
Q. We could just go get a bank loan and not have to give up any equity?
A. It is true there are alternative sources of funding including bank loans through the government supported Small Firms Loan Guarantee scheme; this loan is only available to companies that can prove the ability to repay it, however these loans charge a facility fee, are interest bearing, have fixed payment terms, and the founders are required to give personal guarantees. The 70% guarantee made to banks by the government only kicks in once the personal guarantees from the founders have been exhausted. Our loan is interest free, has no fixed term, is secured only against the business, does not have any personal guarantees and is only repayable if and when the business can afford it without jeopardy to the business. If the business fails (which inevitably some will) the loan is written off. It is made at a time when in most cases the founders have an idea; they may not have incorporated, may not have a business plan or even a well thought out strategy.
Lots of people have understood what we are offering – here is a comment on HN from ‘lionhearted’ which sums it up well.
“I could see circumstances that I’d take this deal in a heartbeat – starting a brand new company with 94% equity, $33k cash in the bank, and a $33k loan with very flexible repayment terms seems like it’d have a much higher chance of success than starting with 100% equity, $0 cash, and $0 debt.”
Q. Isn’t 6% equity for a 20K loan a ridiculous interest rate?
A. The 6% of equity is not directly related to the £20k. The 6% equity is in return for the full programme, including aftercare. We are enabling companies to reach an entirely new level, through the provision of facilities, mentor guidance, accommodation, investors, an evergreen loan and office space for 6-months – plus we will keep a vested interest, providing an open-door policy to the team in Birmingham. An important point is that it’s a loan of UP to £20k – purely to enable the teams to get onto and through the programme. It is not seen as an investment to last them post-bootcamp, but allows them to reach ‘investor day’. They don’t have to take this loan if they don’t require it.
Q. Why wouldn’t I just bootstrap rather than taking a loan?
A. Bootstrapping is a great way for a startup to get off the ground, but often requires the founders to take on debt via credit cards or loans from friends and family which also have to be paid back. The difference here is we are offering a programme (facilities, mentor guidance, accommodation, investors and office space for 6-months) that includes an interest free loan to your business with no personal guarantees. Here is a HN comment from tptacek
“Loans and lines of credit often don’t require equity. They frequently do require you to put up your house. You cannot pull an interest-free loan, backed only by your corporation, off a tree. It is a real offering. It is not reasonable to call it a “mugging”.”
Q. I’m having a hard time understanding why they want the money back if they’re taking so much equity.
A. Typically it takes 3 years + to get a return on an equity deal so if you are running an accelerator at least once a year you need to be able to fund it for at least 3 years before getting (3 * £200k = £600k + running costs = £1million) any return. By using an evergreen loan model we stand a chance of returning some (not all) money to the programme quicker than 3 years and allowing us to sustain the programme and support more entrepreneurs which has to be a good thing for the entire community.
Q. If we make it big it’ll be 6% of a much larger amount (think $10,000,000+). $600,000 is a little more than the interest you’d pay on a $33,000 loan at 6%?
A. The type of high-growth tech businesses we are looking to support on the programme will need additional rounds of funding and therefore our 6% equity will be significantly diluted. It would be great to think that all businesses will exit for $10million + but the reality is very few will so the return is unlikely to be anything like that.
Q. Not all accelerators are equal
A. I agree and not all startups are equal and what works for one doesn’t always work for another. I don’t seek to compete with Tech Stars, Seedcamp, Y combinator or any other scheme. I applaud their efforts in what they do for aspiring entrepreneurs; any reference I make to them is around the fact that we are offering a 13-week bootcamp that is mentor intensive in order to assist companies in raising their next round of funding.
Q. This is a rip off for startup founders who don’t know any better.
A. I think this does the tech community a dis-service. The vast majority have a very good understanding of these matters and are more than capable of weighing up what is the best programme for their startup. The fact that this is not an identical offering to other accelerators does not make it a rip off, it makes it different.
Q. The loan information is buried in the FAQ’s
A. The FAQ’s are hardly buried they are very clearly displayed on the Accelerator page. All the accelerator sites use the FAQ’s to provide the detail around their programmes. However, to ensure its very clear we have added the words “soft loan” next to the £20k on the home page.
Q Why don’t we just get Angel or VC investment?
A. There are a lucky few startups that turn up and pitch an idea to an Angel or VC and get funding but there are more that are not that lucky and have to actually prove traction, have a credible business plan or be revenue generating. What accelerator programmes like ours do is help your startup get to that stage quickly (13-weeks), which means you are much more likely to then find the investment you need to grow the business to the next stage. Of course this is not the only way to become investment-ready; there are plenty of others and only you can make the best choice for your business.
Q. There are lots of accelerators why do we need one that offers loans
A. My experience is that there aren’t enough accelerators to support startups and many talented individuals with great ideas fail to get the support (financial and non-financial) to get their ideas off the ground. My programme is aimed to support those people that see the value of the programme; if they need neither the money or the support because they have all the skills and connections to go it alone then clearly they wouldn’t benefit from the programme. The fact that hundreds of people applying to Tech stars, Y Combinator and other accelerators aren’t successful suggests there is a need for more support to be provided (YC probably got 1000+ applications and selected 60 teams, so that’s 940 teams who will not receive support this year alone).
The rationale for it being an evergreen loan is so that the ones that do repay the loan, at a time when arguably they no longer need it, is to allow other entrepreneurs the same opportunity for the long term. Other schemes such as Difference Engine were funded by regional grant type funding which, as government cash ran out, were closed and therefore no longer open to budding entrepreneurs, despite the fact that many of the companies that benefited from the programme have gone on to successfully raise further rounds of funding with the assistance of the programme and arguably don’t need the original funding anymore. Our aim is to make the programme sustainable and not at the whim of investor sentiment. The evergreen loan model in theory returns money back to the programme quicker than an equity-only model and hence allows us to support more entrepreneurs.
Mark Hales http://oxygenaccelerator.com/blog/2011/05/oh-no-its-a-loan/
Q. We could just go get a bank loan and not have to give up any equity?
A. It is true there are alternative sources of funding including bank loans through the government supported Small Firms Loan Guarantee scheme; this loan is only available to companies that can prove the ability to repay it, however these loans charge a facility fee, are interest bearing, have fixed payment terms, and the founders are required to give personal guarantees. The 70% guarantee made to banks by the government only kicks in once the personal guarantees from the founders have been exhausted. Our loan is interest free, has no fixed term, is secured only against the business, does not have any personal guarantees and is only repayable if and when the business can afford it without jeopardy to the business. If the business fails (which inevitably some will) the loan is written off. It is made at a time when in most cases the founders have an idea; they may not have incorporated, may not have a business plan or even a well thought out strategy.
Lots of people have understood what we are offering – here is a comment on HN from ‘lionhearted’ which sums it up well.
“I could see circumstances that I’d take this deal in a heartbeat – starting a brand new company with 94% equity, $33k cash in the bank, and a $33k loan with very flexible repayment terms seems like it’d have a much higher chance of success than starting with 100% equity, $0 cash, and $0 debt.”
Q. Isn’t 6% equity for a 20K loan a ridiculous interest rate?
A. The 6% of equity is not directly related to the £20k. The 6% equity is in return for the full programme, including aftercare. We are enabling companies to reach an entirely new level, through the provision of facilities, mentor guidance, accommodation, investors, an evergreen loan and office space for 6-months – plus we will keep a vested interest, providing an open-door policy to the team in Birmingham. An important point is that it’s a loan of UP to £20k – purely to enable the teams to get onto and through the programme. It is not seen as an investment to last them post-bootcamp, but allows them to reach ‘investor day’. They don’t have to take this loan if they don’t require it.
Q. Why wouldn’t I just bootstrap rather than taking a loan?
A. Bootstrapping is a great way for a startup to get off the ground, but often requires the founders to take on debt via credit cards or loans from friends and family which also have to be paid back. The difference here is we are offering a programme (facilities, mentor guidance, accommodation, investors and office space for 6-months) that includes an interest free loan to your business with no personal guarantees. Here is a HN comment from tptacek
“Loans and lines of credit often don’t require equity. They frequently do require you to put up your house. You cannot pull an interest-free loan, backed only by your corporation, off a tree. It is a real offering. It is not reasonable to call it a “mugging”.”
Q. I’m having a hard time understanding why they want the money back if they’re taking so much equity.
A. Typically it takes 3 years + to get a return on an equity deal so if you are running an accelerator at least once a year you need to be able to fund it for at least 3 years before getting (3 * £200k = £600k + running costs = £1million) any return. By using an evergreen loan model we stand a chance of returning some (not all) money to the programme quicker than 3 years and allowing us to sustain the programme and support more entrepreneurs which has to be a good thing for the entire community.
Q. If we make it big it’ll be 6% of a much larger amount (think $10,000,000+). $600,000 is a little more than the interest you’d pay on a $33,000 loan at 6%?
A. The type of high-growth tech businesses we are looking to support on the programme will need additional rounds of funding and therefore our 6% equity will be significantly diluted. It would be great to think that all businesses will exit for $10million + but the reality is very few will so the return is unlikely to be anything like that.
Q. Not all accelerators are equal
A. I agree and not all startups are equal and what works for one doesn’t always work for another. I don’t seek to compete with Tech Stars, Seedcamp, Y combinator or any other scheme. I applaud their efforts in what they do for aspiring entrepreneurs; any reference I make to them is around the fact that we are offering a 13-week bootcamp that is mentor intensive in order to assist companies in raising their next round of funding.
Q. This is a rip off for startup founders who don’t know any better.
A. I think this does the tech community a dis-service. The vast majority have a very good understanding of these matters and are more than capable of weighing up what is the best programme for their startup. The fact that this is not an identical offering to other accelerators does not make it a rip off, it makes it different.
Q. The loan information is buried in the FAQ’s
A. The FAQ’s are hardly buried they are very clearly displayed on the Accelerator page. All the accelerator sites use the FAQ’s to provide the detail around their programmes. However, to ensure its very clear we have added the words “soft loan” next to the £20k on the home page.
Q Why don’t we just get Angel or VC investment?
A. There are a lucky few startups that turn up and pitch an idea to an Angel or VC and get funding but there are more that are not that lucky and have to actually prove traction, have a credible business plan or be revenue generating. What accelerator programmes like ours do is help your startup get to that stage quickly (13-weeks), which means you are much more likely to then find the investment you need to grow the business to the next stage. Of course this is not the only way to become investment-ready; there are plenty of others and only you can make the best choice for your business.
Q. There are lots of accelerators why do we need one that offers loans
A. My experience is that there aren’t enough accelerators to support startups and many talented individuals with great ideas fail to get the support (financial and non-financial) to get their ideas off the ground. My programme is aimed to support those people that see the value of the programme; if they need neither the money or the support because they have all the skills and connections to go it alone then clearly they wouldn’t benefit from the programme. The fact that hundreds of people applying to Tech stars, Y Combinator and other accelerators aren’t successful suggests there is a need for more support to be provided (YC probably got 1000+ applications and selected 60 teams, so that’s 940 teams who will not receive support this year alone).
The rationale for it being an evergreen loan is so that the ones that do repay the loan, at a time when arguably they no longer need it, is to allow other entrepreneurs the same opportunity for the long term. Other schemes such as Difference Engine were funded by regional grant type funding which, as government cash ran out, were closed and therefore no longer open to budding entrepreneurs, despite the fact that many of the companies that benefited from the programme have gone on to successfully raise further rounds of funding with the assistance of the programme and arguably don’t need the original funding anymore. Our aim is to make the programme sustainable and not at the whim of investor sentiment. The evergreen loan model in theory returns money back to the programme quicker than an equity-only model and hence allows us to support more entrepreneurs.
Mark Hales http://oxygenaccelerator.com/blog/2011/05/oh-no-its-a-loan/
From their FAQ (http://oxygenaccelerator.com/accelerator/faqs/):
When do I have to pay the pre-seed funding back?
Don’t worry, we really don’t want you to hand over the keys to your house or car – this is a soft loan. Our interest is in your success and therefore will only look for the loan to be repaid when it makes sense for your business. This will be done on a case-by-case basis.
When do I have to pay the pre-seed funding back?
Don’t worry, we really don’t want you to hand over the keys to your house or car – this is a soft loan. Our interest is in your success and therefore will only look for the loan to be repaid when it makes sense for your business. This will be done on a case-by-case basis.
It's like saying: give me your house and don't worry, despite the property transfer, I'll allow you to continue to stay there for free; evictions will be done on a case-by-case basis.
Not really, Orrick has a startup legal package where they give you a bunch of legal guidance, advice and documents as well as get you incorporated etc.
Typically, its $10,000 or more in legal help. They dont require you to pay them unless you raise at least $500K in funding -- if you crash and burn before hand and your startup falls apart - they do not ask for any payment.
This happened with me in the past - and I would further recommend their services to anyone.
Typically, its $10,000 or more in legal help. They dont require you to pay them unless you raise at least $500K in funding -- if you crash and burn before hand and your startup falls apart - they do not ask for any payment.
This happened with me in the past - and I would further recommend their services to anyone.
That's a FAQ, not a legal contract. Is the contract for a "hard" loan ? As Chekov said, don't put a gun on the table in act one if you don't intend it to shoot in act three.
This is asking for trouble -- it's really ambiguous, and can easily lead to troubled waters in the near future.
Anyone who's lost money in their startup investment knows what I'm talking about. ("Oh yeah, I know it's risky, don't worry" ... "Wait, did you try hard enough? What are going to do, jump ship NOW??")
Their idea of an "evergreen" fund is cute, but it's ultimately flawed. Most startups fail.
Anyone who's lost money in their startup investment knows what I'm talking about. ("Oh yeah, I know it's risky, don't worry" ... "Wait, did you try hard enough? What are going to do, jump ship NOW??")
Their idea of an "evergreen" fund is cute, but it's ultimately flawed. Most startups fail.
I read the FAQ and the phrase that immediately popped up in my head was "loan sharks":
- It wasn't at all clear from the website that the money would be a loan - I only got confirmation of this after several clicks to get to the FAQ.
- "Case-by-case" basis? Does that mean if they think someone is going to tank they'll ask for their money back? or perhaps they'll want it back before the next cycle?
- As another commenter has said, the phrase "don't worry" from money lenders makes me feel queasy.
I realise the above points are very touchy-feely but compared to what else is out there, I wouldn't be willing to even consider these guys.
- It wasn't at all clear from the website that the money would be a loan - I only got confirmation of this after several clicks to get to the FAQ.
- "Case-by-case" basis? Does that mean if they think someone is going to tank they'll ask for their money back? or perhaps they'll want it back before the next cycle?
- As another commenter has said, the phrase "don't worry" from money lenders makes me feel queasy.
I realise the above points are very touchy-feely but compared to what else is out there, I wouldn't be willing to even consider these guys.
This sounds a bit suspicious to me, i.e. I couldn't help but reading this in a fake Brooklyn/Jersey accent wise guy accent.
How are such loans handled in the UK regarding liability? I mean, if you have a limited company, does one of the founders have to vouch for it with his personal possessions (as it's often handled here in Germany, for obvious reasons)?
Yes, if you're doing good, they won't be hasty in getting the money back, but they just might kick you on your way down, possibly thus ruining your last shot of getting back up again.
How are such loans handled in the UK regarding liability? I mean, if you have a limited company, does one of the founders have to vouch for it with his personal possessions (as it's often handled here in Germany, for obvious reasons)?
Yes, if you're doing good, they won't be hasty in getting the money back, but they just might kick you on your way down, possibly thus ruining your last shot of getting back up again.
Reason number seven million we are not registered in Germany.
Seriously, though, how difficult is it to get a limited liability going in Germany? Moving there next month.
Seriously, though, how difficult is it to get a limited liability going in Germany? Moving there next month.
Pretty easy nowadays. The traditional way is the GmbH, which required you to have a capital of 25k Euros. Now as we're in the EU, you could register your company everywhere and lots of countries provided you with easier access to limited liability. As an answer to this, there's a beginner's version, the "UG", where the lower limit of starting capital is 1 Euro and unless you have more than three founders, there are form letters that make the legalities very easy.
Good - sounds more competitive.
It cost us 100€ with min of 1€ capital in the Republic + 10€ legal swearing fee. I filled in the form myself.
It cost us 100€ with min of 1€ capital in the Republic + 10€ legal swearing fee. I filled in the form myself.
In the UK the liability of directors is limited to the nominal value originally invested (usually £100).
Thus limited, this isn't that much different in Germany. I wasn't really asking about the legal ramifications, but how the banks treat it (and if this incubator does it differently).
Let's say a director of a limited company with a low capital (UK Ltd, German UG etc.) wants to take out a loan on the company. The default risk would be pretty high, and so it's standard practice that the loan contract includes and additional clause that the director is directly liable. Doesn't change the law itself, just an additional contractual obligation.
That's why I'm interested in how the UK banks (and/or this incubator) would treat this. Either they do it the same way, the state takes care of such losses or they're much more eager to accept risks than banks here (which, given recent history, wouldn't surprise me either).
20k GPB for 6% strikes me as rather high, as -- never mind all the aforementioned scrutiny -- getting a loan that high isn't really that much of a deal.
Let's say a director of a limited company with a low capital (UK Ltd, German UG etc.) wants to take out a loan on the company. The default risk would be pretty high, and so it's standard practice that the loan contract includes and additional clause that the director is directly liable. Doesn't change the law itself, just an additional contractual obligation.
That's why I'm interested in how the UK banks (and/or this incubator) would treat this. Either they do it the same way, the state takes care of such losses or they're much more eager to accept risks than banks here (which, given recent history, wouldn't surprise me either).
20k GPB for 6% strikes me as rather high, as -- never mind all the aforementioned scrutiny -- getting a loan that high isn't really that much of a deal.
I know nothing of this incubator, but I've heard that banks often ask for personal guarantees. There are various cases I've heard of where the business has failed and people have lost their homes, which were used as guarantee.
It probably comes down to what can be negotiated and I think it's mostly the same as you describe in Germany: Liability is limited unless you agree that it is not.
As a side note, I've had personal experience of one fund which hoped to get back the money given regardless of success or failure. I declined to get involved with them.
It probably comes down to what can be negotiated and I think it's mostly the same as you describe in Germany: Liability is limited unless you agree that it is not.
As a side note, I've had personal experience of one fund which hoped to get back the money given regardless of success or failure. I declined to get involved with them.
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So that's around $33k USD.
They're only looking to be paid back if you reach profitability.
6% equity to get a $33k loan and some sort of training/advising for 13 weeks at their facility, and office space afterwards? Could be a good deal, especially if you have a new business that requires medium amounts of capital costs to get started. If you're getting something manufactured and your first run/prototyping/etc is going to run you $15k, it might be good to do that on their dime. If it works out and you get profitable, you pay them back and they've got their equity. If it fails, they're out the money.
Could be good, depending on your circumstance and the specific terms on it. I could see lots of cases where that'd add far more than 6% chance of success and value to the business.
Edit: Gosh, a lot of reply comments. To clarify:
-You should always, always read the terms carefully in any important contract you're going to sign, and strongly consider hiring a lawyer to give it a once-over.
-In this particular deal, you'd want to make sure the loan isn't personally guaranteed and what the terms of calling it are.
-I could see times where I'd be ecstatic to take this. Lots of brand new companies would have a much higher success chance and EV with 94% equity, $33k cash in the bank, and $33k in debt with flexible repayment terms than 100% equity, $0 cash, and $0 debt.
-Money's worth a lot, and people often underestimate how much it's worth. Especially for an unproven, speculative venture.
-It might or might not be a good deal depending on your specific circumstances, and the exact terms of the loan. Again, read contracts carefully and strongly consider hiring a lawyer to look it over.
-As always, consider not making flippant comments on Hacker News? It's kind of tiresome to get ignorant and flippant replies when you're trying to do a neutral, factual analysis.
They're only looking to be paid back if you reach profitability.
6% equity to get a $33k loan and some sort of training/advising for 13 weeks at their facility, and office space afterwards? Could be a good deal, especially if you have a new business that requires medium amounts of capital costs to get started. If you're getting something manufactured and your first run/prototyping/etc is going to run you $15k, it might be good to do that on their dime. If it works out and you get profitable, you pay them back and they've got their equity. If it fails, they're out the money.
Could be good, depending on your circumstance and the specific terms on it. I could see lots of cases where that'd add far more than 6% chance of success and value to the business.
Edit: Gosh, a lot of reply comments. To clarify:
-You should always, always read the terms carefully in any important contract you're going to sign, and strongly consider hiring a lawyer to give it a once-over.
-In this particular deal, you'd want to make sure the loan isn't personally guaranteed and what the terms of calling it are.
-I could see times where I'd be ecstatic to take this. Lots of brand new companies would have a much higher success chance and EV with 94% equity, $33k cash in the bank, and $33k in debt with flexible repayment terms than 100% equity, $0 cash, and $0 debt.
-Money's worth a lot, and people often underestimate how much it's worth. Especially for an unproven, speculative venture.
-It might or might not be a good deal depending on your specific circumstances, and the exact terms of the loan. Again, read contracts carefully and strongly consider hiring a lawyer to look it over.
-As always, consider not making flippant comments on Hacker News? It's kind of tiresome to get ignorant and flippant replies when you're trying to do a neutral, factual analysis.
The whole reason I wrote the post is because they're acting as if it's normal to ask for equity for a loan (and a tiny loan at that). YC, TechStars, Seedcamp, etc all invest in their companies - not loan them money.
The whole thing smacks of a rich guy who just thinks he can throw around his money, call it an 'accelerator' and take candy from babies.
I'm doubly angry because here in the UK, we're struggling to get support for new startups and entrepreneurs. Shady deals like this only make it harder for people who genuinely want to support startups (like Seedcamp) to gain traction in the mainstream media.
The whole thing smacks of a rich guy who just thinks he can throw around his money, call it an 'accelerator' and take candy from babies.
I'm doubly angry because here in the UK, we're struggling to get support for new startups and entrepreneurs. Shady deals like this only make it harder for people who genuinely want to support startups (like Seedcamp) to gain traction in the mainstream media.
Slightly OT: You may want to remove hyper-linking to them in the article. You do not intent to promote them, right?
I can't make a valid argument without linking to the service I'm calling in to question.
You can use a rel:nofollow link. Then search engines won't take it into account.
Good point. Cheers.
It doesn't say anything about not having to pay it back if you don't reach profitability. Their answer to "Do I have to pay back the pre-seed funding?" is "Yes".
Did you stop reading right there? Here's the next line -
> When do I have to pay the pre-seed funding back? Don’t worry, we really don’t want you to hand over the keys to your house or car – this is a soft loan. Our interest is in your success and therefore will only look for the loan to be repaid when it makes sense for your business. This will be done on a case-by-case basis.
It makes it sound like the loan is to the business - with limited liability, you don't have to pay it back if the business fails.
They say they're flexible on being paid back, and do it on a case by case basis. Anyone doing it should read the contract/loan terms very carefully to make sure there's no personal guarantee and what Oxygen's rights to call the loan are. But assuming the contract terms match the general vibe they've got on their site, it could be a good opportunity. Again, depending on the specific terms and circumstances.
> When do I have to pay the pre-seed funding back? Don’t worry, we really don’t want you to hand over the keys to your house or car – this is a soft loan. Our interest is in your success and therefore will only look for the loan to be repaid when it makes sense for your business. This will be done on a case-by-case basis.
It makes it sound like the loan is to the business - with limited liability, you don't have to pay it back if the business fails.
They say they're flexible on being paid back, and do it on a case by case basis. Anyone doing it should read the contract/loan terms very carefully to make sure there's no personal guarantee and what Oxygen's rights to call the loan are. But assuming the contract terms match the general vibe they've got on their site, it could be a good opportunity. Again, depending on the specific terms and circumstances.
"Don't worry", coming from people who I'm going to owe money to, generally makes me worry.
It certainly _sounds_ that way, but the fine print is what matters. Is the loan a liability of the founder? or the company? Are these super-early ventures actually incorporated? Do they have the savvy to ask these questions? For the sums involved they certainly can't afford much legal advice.
And the structure isn't necessary to meet the stated goal of an "evergreen" fund, as equity returns on successful venture should fill that need.
It's an odd structure, at best.
And the structure isn't necessary to meet the stated goal of an "evergreen" fund, as equity returns on successful venture should fill that need.
It's an odd structure, at best.
I've seen loan-for-equity twice in real life, and both times it built profitable businesses. Though they were both older types of businesses with established business models that needed capital to get started, not technology.
Anyways, yes, you should always read the terms on an important contract very carefully, and here's no different. Probably a bad deal if there's a personal guarantee on the loan.
But assuming the contract is square, I could see circumstances that I'd take this deal in a heartbeat - starting a brand new company with 94% equity, $33k cash in the bank, and a $33k loan with very flexible repayment terms seems like it'd have a much higher chance of success than starting with 100% equity, $0 cash, and $0 debt.
Anyways, yes, you should always read the terms on an important contract very carefully, and here's no different. Probably a bad deal if there's a personal guarantee on the loan.
But assuming the contract is square, I could see circumstances that I'd take this deal in a heartbeat - starting a brand new company with 94% equity, $33k cash in the bank, and a $33k loan with very flexible repayment terms seems like it'd have a much higher chance of success than starting with 100% equity, $0 cash, and $0 debt.
Thanks for being the voice of reason lionhearted. It's a little to early to condemn this incubator. The rush to judgement does highlight the need to be totally transparent these days. If you fail to spell out your terms clearly you're going to get raked over the coals by some blogger.
BTW. I don't see what's wrong with a personal guarantee. It's nice that you are willing to risk other peoples money, but I think you should be ready to "make one heap of all your winnings, and risk it on one turn of pitch-and-toss". Then you'll be a man.
BTW. I don't see what's wrong with a personal guarantee. It's nice that you are willing to risk other peoples money, but I think you should be ready to "make one heap of all your winnings, and risk it on one turn of pitch-and-toss". Then you'll be a man.
The problem with a personal guarantee is that the lender will always take everything they possibly can, and a personal guarantee leaves no boundaries. It makes it impossible to start up without risking fundamentals of life like housing and transportation, and almost definitely leads to bankruptcy in case things go south. This is OK for some people in the 18-25 age range when they can just go move back in with Mom, but it doesn't work for people with families, people without a safety net, etc.
Your lender is not risking his house to loan your company money and you shouldn't risk your house either, especially if you have a family. It's not so easy to start over once you get married and have a couple of kids, and it's not worth risking getting thrown out on the street if it means your children are going to be sleeping in the gutter.
Your lender is not risking his house to loan your company money and you shouldn't risk your house either, especially if you have a family. It's not so easy to start over once you get married and have a couple of kids, and it's not worth risking getting thrown out on the street if it means your children are going to be sleeping in the gutter.
Worth adding that given the likelihoods of failure of a startup (high), risking the house on it would be insane.
yeah, they say that if you work for someone who puts their own money in to the business you have an insane boss.
On the other hand, this is how most small businesses owners I've met did it. Most of us lack the connections to get people to give us money on "eh, if it doesn't work out, we forget about it." terms.
Hell, try to get any kind of lease as a small company without personally co-signing. "If you don't believe in your company, why should I?" is something that more than one landlord has told me.
So yeah, while you could say it is insane, it's also quite difficult to get a company off the ground without accepting some personal liability on the downside.
On the other hand, this is how most small businesses owners I've met did it. Most of us lack the connections to get people to give us money on "eh, if it doesn't work out, we forget about it." terms.
Hell, try to get any kind of lease as a small company without personally co-signing. "If you don't believe in your company, why should I?" is something that more than one landlord has told me.
So yeah, while you could say it is insane, it's also quite difficult to get a company off the ground without accepting some personal liability on the downside.
the 'safety net' that saved me from bankruptcy (and bankruptcy will save your children from sleeping in the gutter) was personal earning power; in '06-early '07, when my company was deeply in the hole, I found a body shop willing to do corp-to-corp and turned myself out. I worked for other people until the debit was paid off[1].
The other side of that is when you think about what 'deep in debit' means, you should calibrate that to your own personal earning power. This is easier than it sounds; it's hard to get people to loan you more than you can reasonably pay back. Your creditors fear your bankruptcy more than you do.
From what I've seen, starting a failed business does not decrease your earning power. I know I'm a more valuable employee now; aside from the technical skills I've obtained, I now understand a lot more of what the boss actually wants. (unfortunately, most of that knowledge only applies to small companies. Large corps, it seems, operate under different rules, rules I still do not understand.)
[1] I ended up deciding not to shut down the company, so I continued the arrangement until the company was making enough money to pay me a living wage.
The other side of that is when you think about what 'deep in debit' means, you should calibrate that to your own personal earning power. This is easier than it sounds; it's hard to get people to loan you more than you can reasonably pay back. Your creditors fear your bankruptcy more than you do.
From what I've seen, starting a failed business does not decrease your earning power. I know I'm a more valuable employee now; aside from the technical skills I've obtained, I now understand a lot more of what the boss actually wants. (unfortunately, most of that knowledge only applies to small companies. Large corps, it seems, operate under different rules, rules I still do not understand.)
[1] I ended up deciding not to shut down the company, so I continued the arrangement until the company was making enough money to pay me a living wage.
How did you conclude "loan is to the business - with limited liability, you don't have to pay it back if the business fails." from "will only look for the loan to be repaid when it makes sense for your business. This will be done on a case-by-case basis."? I won't.
It just means, they rather discuss the terms of loans individually, on case to case basis.
It just means, they rather discuss the terms of loans individually, on case to case basis.
Phrases like "Don't worry" and "Trust us" would cause me to walk away immediately.
"Hey guys we're really just a bunch of cool, laid-back guys who are only interested in the success of your business. SRSLY"
I'd be very interested to see what their rights to call the loan are. If they demanded to be paid out of the next round it could be disasterous.
fixed price of investment deals are inevitably doomed by the problem of average pricing. only startups that find it a good deal will take it and by rule of nature they are the ones with the least attractive prospects.
(ycombinator can defeat this by continuously manufacturing holy water - just like the old vcs did. the halo effect makes an investment from yc both more valuable and variable than the fixed price on offer)
(ycombinator can defeat this by continuously manufacturing holy water - just like the old vcs did. the halo effect makes an investment from yc both more valuable and variable than the fixed price on offer)
Almost all incubators aren't worth the time/equity given up.
My startup applied for YC and (having not made it) will not be pursuing any others. We may apply for YC again, not for the money but the experience and the alumni.
Experience and Alumni.
My startup applied for YC and (having not made it) will not be pursuing any others. We may apply for YC again, not for the money but the experience and the alumni.
Experience and Alumni.
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This is an interesting post from an unlikely source. I think carsonified Wil soon be the Arrington of bullshit startup advice. Just trying to peddle those CSS3 How To Videos...what a joke.
I guess the fact I've started four companies doesn't count :)
- One acquired - One failed - One currently humming along profitably - One currently growing at an insane pace (thankfully!)
- One acquired - One failed - One currently humming along profitably - One currently growing at an insane pace (thankfully!)
Don't feed the trolls! :-)
Dude, you're rewinding all the work I've done on trying to tell others how amazing and friendly the web community in Greenville is. How about some substantial examples about Carsonified's bad advice instead of just trashing us?
repoleved is unwinding all of your work with a single messageboard comment?
I have seen this domain spammed to various link aggregators many times. I too am surprised to see content that exceeds a link to an off-site design tutorial. Thank you for the original content Mr Carson. I hope we see more posts like this in the future.
Completely uncalled for.
What's the joke?
First of all the loan we are talking about is a ‘soft’ loan to the businesses taking part – with no personal guarantees and will be interest free.
As part of the application process we’ll sit down with each team to understand their funding needs and will only ask for the loan to be repaid once / if this level of funding or more has been achieved, or they reach a level of profitability to support loan repayments, again we will agree this in advance but the key point here is that we will build in an agreed level of headroom with the founders.
This will not be a complicated loan agreement, we only want to have the money back to reinvest in the next round of entrepreneurs when its right for the business, i.e., there wont be any clever call options. Teams will be given full sight of this and we will encourage them to get advice before they sign up to anything.