Preparing for Funding Ep6: Accelerators/Incubators – Recut

Office Hours is our podcast covering general issues related to small businesses and startups. Preparing For Funding is a series of Office Hours episodes hosted by VW Partners Kevin Vela and Rad Wood about getting your company’s legal house in order before taking on funding. We are recutting this series to reflect updates in law and venture trends in the last 5 years to better help you navigate through preparing for funding.

In this episode, we break down the differences between accelerators and incubators and discuss how to determine if an accelerator is a good fit for your company.

Time Stamps

  • :36 – Accelerators v. Incubators
  • 4:34 – The Best Accelerators 
  • 7:35 – Y Combinator Terms
  • 10:37 – How to Make Sure an Accelerator is a Good Fit for Your Company
  • 11:01 – Off-Market Terms
  • 16:18 – Techstars Terms
  • 19:53 – Treating Accelerators as a Venture Fund

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Click here to view terms used in this podcast

An Accelerator is a program whose intent is to “accelerate” the development of startups. Typically an accelerator will last one to three months and aims to provide support to startups through small amounts of seed capital, mentoring, training, and events for a finite period. It is common for an accelerator to receive some equity in the participating companies in exchange for the company’s participation in the program.

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Bridge Round

A Bridge Round is a round of funding that comes between rounds. Typically, a bridge round can be used to extend a startup’s financial runway as it prepares for a larger round. For example, a startup may not be ready for a Series A round from a product development or valuation standpoint, so a bridge round can be used to bring in capital to get the startup ready for Series A.

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Cohort is a term used by VCs when analyzing customer data. A group of customers (i.e. customers acquired in a certain month) comprise a cohort and are then tracked against other cohorts.

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Common Stock

Common Stock is an equity ownership in a company. Common stock is typically issued before any other type of equity. Once a company has raised capital, common stock typically has junior liquidation and distribution rights to other stockholders and creditors.

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Conversion Discount

A Conversion Discount is when the holder of a convertible note has a right to convert into a subsequent financing round or transaction at a “discount” to the price per share of that round.

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Convertible Debt

Convertible Debt is an alternative to equity fundraising. The investor “lends” the startup money at a reasonable interest rate and with a maturity date in the 12-24 month range (usually). The understanding and intent of the investor and company is not for the startup to repay the debt, but rather for that debt to convert into equity at a discount to the next round. A convertible debt round typically includes a Convertible Note and a Convertible Note Purchase Agreement.

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Demo Day

Demo Day is “pitch day,” or when startups in an accelerator pitch to investors.

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Dilution is the reduction in ownership percentage of a share of stock caused by the issuance of new stock.

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Down Round

A Down Round is a round of financing when the startup is at a lower valuation than the valuation placed upon the startup by earlier investors.

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A Founder creates or participates in the formation stage of a startup. Founders receive the startup’s initial shares in return for a capital contribution or services provided to the company.

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Early-Stage Financing

Early-Stage Financing refers to investments that happen early in a company’s lifecycle.

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Full Ratchet Anti-Dilution

Full Ratchet Anti-Dilution is a shareholder protection provision that prevents early shareholders who have the protection from being diluted by later down rounds. If the company has a down round, the price the original shareholder paid for its securities is reduced to match the price paid by the investors in the down round. Full ratchet is a great provision for a shareholder who gets the right, but full ratchet may end up causing more harm than good due to pushback from other shareholders who do not enjoy the right. It typically only is appropriate in a pay-to-play or distressed situation.

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An Incubator is an entity designed to develop business ideas and/or new technology to the extent they become attractive to venture capitalists. An incubator typically provides physical space and some or all of the services needed for a business idea to develop.

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Market Terms

Market Terms are terms in an agreement that are standard or “market.” In regard to venture capital agreements, most startups and investors use and as a baseline for setting terms for those rounds.

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Most Favored Nations Clause

A Most Favored Nations Clause requires that the company gives the investor the best possible investment terms in the future. Note that this right usually expires after the next round. From a company perspective, try to avoid MFN clauses when possible.

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Option Plan

An Option Plan is a plan created by a company to issue stock options to its employees and service providers.

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Price Cap

A Price Cap, also known as a Conversion Cap or Valuation Cap, is the greatest valuation used to convert a convertible note into equity in the company.

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Price Per Share

The Price Per Share is the price for a single share of stock. The price per share can be determined by dividing the pre-money valuation by the number of outstanding shares. $1.5 million pre-money divided by 10,000,000 shares is $0.15 price per share.

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Priced Round

A Priced Round (or Equity Round) is any round of financing in which investors receive a set amount of equity for an agreed upon price. Contrast with Convertible Debt Round.

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Pro-Rata means proportional. For instance, if investors have a pro-rata Right of First Offer, then that means each investor will have a right to purchase new securities in proportion to their ownership. I.e. if an investor owns 5% of a company, he/she will have the ability to buy 5% of the securities in the new offer.

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A Ratchet is an anti-dilution protection that, in a down round, allows an investor to adjust the price it paid to prevent all or some of the dilution by maintaining the same percentage or a slightly lower percentage of ownership in the company.

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Right of First Offer (ROFO)

The Right of First Offer (ROFO) is a contractual obligation by the owner of an asset to negotiate the sale of the asset with the rights holder before offering sale of the asset to any third parties. In the context of startups, this usually gives an investor the right to purchase his or her pro-rata ownership of any new securities issued by a startup. This is a way to prevent ownership dilution.

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SAFE is an acronym for “simple agreement for future equity,” which is an alternative to the issuance of convertible debt.

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A Redline is a document which has been marked up with comments or modifications and has been “redlined” so that the other party can easily identify the changes.

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A Unicorn is a startup company valued at over $1 billion. Canadian tech unicorns are known as narwhals. A decacorn is a word used for those companies over $10 billion, while hectocorn is the appropriate term for such a company valued over $100 billion.

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Valuation is the process of determining a company’s worth. Valuations can be determined as multiplies of the company’s metrics or comparisons to other companies that recently valued at certain amounts.

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Venture Capital Fund

Venture Capital Funds are investment funds that invest in startups and seek high returns in exchange for the risky nature of investing in startups.

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A Warrant is a security that gives the warrant holder the right, but not the obligation, to buy or sell a security at a certain price before a set expiration time or milestone.

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Other Podcasts in this Series
1 of 15 Preparing for Funding
Preparing for Funding Ep1: Incorporation
2 of 15 Preparing for Funding
Preparing for Funding Ep2: Founders Agreements
3 of 15 Office Hours
Preparing for Funding Ep3: Friends & Family Funding
4 of 15 Preparing for Funding
Preparing for Funding Ep4: Pitch Decks
5 of 15 Office Hours
Preparing for Funding Ep5: Initial Sophisticated Investors
6 of 15 Office Hours
Preparing for Funding Ep6: Accelerators / Incubators
7 of 15 Office Hours
Preparing for Funding Ep7: Seed Round
8 of 15 Office Hours
Preparing for Funding Overview
9 of 15 Office Hours
Preparing for Funding Ep1: Incorporation – Recut
10 of 15 Office Hours
Preparing for Funding Ep2: Founders’ Agreements – Recut