They thought they were joining an accelerator – instead they lost their startups
techcrunch.com
techcrunch.com
Hopefully everyone knows this here, but if you paid for an introduction it's a negative signal: just cold email.
That being said, I'll make intros for only $6,500 and no warrants.
In addition, if they have a strong case and a law firm believes they could gain more than their fees, they'll often still take the case.
In other words: Do not let the idea of vague "legal fees" scare you off from pursuing a genuine grievance. At least consult with a few law firms.
This is the primary basis that California used to disqualify non-executive non-competes (before they were outright legislated out).
The legal basis for voiding contracts is "unconscionability".
There was no equitable value, which directly led into economic restraint and servitude arguments.
> The legal basis for voiding contracts is "unconscionability".
Not sure what you're referring to here, but you should review "balance of contract" and "fair and equitable terms" in US and California contract law.
Second lowest because sustainable value extraction is important to me.
Hear me out - we are introducing a PaaS (Pitch as a Service) platform so that founders only pay for what VC is interested in listening.
It's just $0.003/word, allowing you to optimize your introduction. It's also lazily evaluated: if someone gets bored with it, you get cut off from your introduction and just pay for what you said up to that point.
We are offering discounts for the words "AI", "LLM", and "web3". Those are half the price.
I understand some entrepreneurs are very out of the loop / far from the VC ecosystem, but even just Googling about it you will find lots of clear advice to never pay for introductions or accelerators.
We can sit here and say we don't understand how people fall for Nigerian princes, attorneys for the estate of long lost cousins, and all that sort of thing, but clearly it works on some people vulnerable and wishful enough to believe it.
Exhibit A: Naval Ravikant, the flagship SV investor, widely regarded to as "a wise man", just released a kind of crappy messaging app that flopped. Imagine having unlimited leverage, unlimited money, unlimited reputation, a huge audience already in place and still that not being enough to put out a competent product. Now imagine this guy asking for 20-30% of your company equity in exchange for "advice", lol.
Are you sure he was 'the flagship SV investor, widely regarded...' among serious SV folks?
Or just among the peanut gallery?
Anyway, he is a successful entrepreneur having built AngelList. Sure, maybe he isn’t Midas, but a single failure in a startup doesn’t make someone an idiot. But assuming you are referring to AirChat, it seems too early to call it a failure anyway.
You'd be surprised at how common that is.
Wouldn't you be inclined to believe that @naval wouldn't want to use that capital, connections and whatnot to support the single project of its own authorship in its lifetime? The results speak for themselves.
I have another theory, VCs freeride on the success and luck of other people's projects, which (sometimes) are so good and so profitable that they can even afford to have someone leeching off them. Just look at how many stories are there where the founders end up with zilch and regret ever taking VC money.
Any of the random guys on Twitter that are building and shipping stuff and making 4-5 figures on their side projects is worth more than a 1,000 Denpoks sharing their "wisdom" with you.
As for founders ending up with nothing, in those cases their investors ended up with much much less than they were hoping to too. Plus there’s plenty of other cases where founders get rich off a worthless company because of the beneficence of VCs.
Yeah, this isn't true for a number of reasons.
1) The money you accept is given in trade for a percentage of the company and that means influence in the company. That influence almost always comes in the form of board seats which literally drive the direction of the company. I've seen many successful companies do some really stupid things because the investors wanted it that way and it actively hurt the business.
2) Certain investors come with a set of prestige. You're the n a forum which is known for just that.
Who you take money from certainly matters.
Most pre-seed and seed investors don't take board seats.
And at Series A and above they are putting in enough money where it seems fair enough.
VCs are running a business too. Most VCs fail to return the capital to their LPs. That’s right, then spend 10 years of their life working with startups and have nothing at the end. They take RISK and they try to DERISK their investment by helping the portfolio company.
There’s also a LOT of stories where a VC invests a LOT of money only for the company to get recapped. The founders are given (some say rewarded) with new equity with the VC is wiped out. In many cases a founder will exit handsomely and the early VCs who came in end up with nothing. That’s the risk.
VC is simple but it’s not easy.
How do they avoid starving to death after the first few days?
Or do they get paid? Is it a lot?
If this isn't gonna fail dramatically, I'm eating my hat
Depends on the failure
You could have just said: dumb founders want dumb money.
But... not all founders are dumb.
I don't think releasing a messaging app that flops is bad? If getting a messaging app to succeed was easy then there would be more successes at it.
For an exec, it's a "learning experience." Most startups fail. Take the VC cash, fail, and "learn" on their dime.
For any employee, it's s short stint to list on a resume that will make them less attractive to recruiters for the rest of their careers. "Why were you only at FooBarCorp for Baz months?" (Oh, wonderful - how do I explain without throwing anyone under the bus?)
If you can't make the story about working on Navel's messaging app a win for your career then your resume is probably going to have other problems.
If Airchat "flopped" it still got way more usage than most bootstrapped startups ever see.
I don’t know too many bootstrapped companies that are billion dollar plus but most well run bootstrapped companies can end up becoming successful small and mid level companies that make a decent money. At least from a revenue:num_employees, can’t be capital intensive so they have to be profitable from early on. Pls explain I’m interested to learn thanx
No, a lot of the marketing/hype just came from Naval and other influencers on Twitter.
> most well run bootstrapped companies can end up becoming successful small and mid level companies that make a decent money
"well run" is doing a lot of work here, but:
- Most bootstrapped companies fail, period.
- Most of them fail without anyone ever noticing they existed. It's very hard to break through the noise, and I know lots of companies/projects that failed without ever getting more than a handful of users.
And how does VC help? Is it just the capital infusion or something else
I'm no longer in the startup scene so I can't vouch for its facts, however.
Thank you, it's what I'm looking for to understand why.
So you don't know which of the many accelerators are problematic or not or what their incentives are.
It is a loan then, not an investment.
Plus it isn't great for customer relations and poor people are great clients for a bank who knows they can hit them for more and more fees.
(The exception being overdrafts in Blighty which don't have fixed repayments agreed. Even then, the bank can't act unfairly).
Where do you live where this is the commonplace? Such terms would be laughed at here.
Check your loan agreement, I'm fairly confident there are ways for them to collect the full amount immediately.
This is very different from allowing the loan to be recalled "at any time" as you first stated.
>under certain conditions
Pick a lane, marty
It's unfortunate to see a founder believe that one accelerator would make or break their company. Typically an accelerator amplifies your existing trajectory - if you're a fast-growing company, you'll get more term sheets from investors than you know what to do with. If you're flat, they won't be attracting investors in any way. It's a founder's job to navigate this instead of relying on the accelerator to find $500k.
If only they had a word increasing velocity :)
People have no idea how few startups really cash out, and how hard it is when you start from low equity percentages/have bad terms.
The horror stories usually dont arise until a startup is actually worth something and has a future. This is usually 2 years+ into the journey.
I think the typical founders doing this are actually just people that want to say they own a company at dinner parties.
> A popular venture studio based out of NYC is like this
I was in their pipeline and interviewing potential business cofounders, but chose to go the traditional venture route - it didn't work out, but I don't think I'd have succeeded at the Fractal business either.
As a founder, you’re in control. Your equity is worth as much as you make it! But the more funding you need to take on, the more diluted you’ll be. Bootstrappers grow slower but remain in complete control, and can’t be screwed by rare events like this one (or more common dilutive events, which VCs may force on you).
To anyone who may be in this kind of situation, trust your instincts and leave. It will not get better. You will find other, better opportunities elsewhere. Best lesson I ever learned was from a high level exec that had just started at the company where I worked. He quit in 2 weeks. Impressively, he did it without drama or really even causing bad will - he just told the CEO it wasn't a match, and that the longer he stayed the more detrimental it would be to both himself and the company. I wish I had followed his lead - I was too worried about what it would look like to leave a company so soon after joining.
This was on the ads team. The job involved managing ads on our site (via google ads and some other providers). They had never done this sort of thing before[1] and were not up to being thrown in the deep end.
[1] I think they had done other sorts of advertising, just not for websites
I guess the chance is small people will remember them, but you never know where you'll come across someone again - I had someone (that I thankfully had better memories of) that had worked for me show apply for a totally different position at a different company where I was the hiring manager without knowing I worked there, for example...
Seems that raw pragmatism/self-preservation clashes with conscientiousness in some cases like this.
You don’t have to put every job on your resume. :)
The scam artists are definitely the people preying on entrepreneurs' dreams to sell a worthless accelerator membership.
The CEO's post on LinkedIn made it seem like they found it tough to get funding in general.
Sometimes one needs to admit they were conned, and start over...
When people start out, no one tells them there is an ecosystem of legal-cons that target vulnerable small firms. Even this forum has users the constantly spam people with various funding scams.
My condolences, some lessons can take a year or two to recover... =3
> "[My father] was chairman of the original Grand Trunk Company. The clacks was his vision. Hell, he designed half of the mechanisms in the towers. And he got together with a group of other engineers, all serious men with slide rules, and they borrowed money and mortgaged their houses and built a local system and poured the money back in and started building the Trunk. There was a lot of money coming in; every city wanted to be in on it, everyone was going to be rich. [...]
> Everything was going fine and suddenly he got this letter and there were meetings and they said he was lucky not to go to prison for, oh, I don't know, something complicated and legal. But the clacks was still making huge amounts. Can you understand that? Reacher Gilt and his gang acted friendly, oh yes, but they were buying up the mortgages and controlling banks and moving numbers around and they pulled the Grand Trunk out from under us like thieves. All they want to do is make money. They don't care about the Trunk. They'll run it into the ground and make more money by selling it."
-- Going Postal by Terry Pratchett
Any CEO worth anything owns their mistakes, adapts, and mitigates future issues.
Good luck out there =3
"mhm mhm Austin...makes sense..."
"I wonder when the Florida scams are gonna start hitting?"
Eager eyed entrepreneurs follow
And the sharks are just waiting
> “They were struggling with it. Andrew kept jumping in and interrupting them, and directly challenging them.” And finally, recalled the source, Ryan said, “This was a test for individuals that I’ve asked to do this today. I was going to fire one of you, based on whoever did the worst job.”
> He then singled out one person, told the room the person was fired, and, this person recalled, Ryan then said, “I do stuff sometimes to see who’s loyal and to see who is going to do what I tell them to do. This was a test and you failed. You’re out.’”
> After seeing Ryan fire this guy in front of the whole room, “I literally watched all of his direct reports sitting there saying to themselves, ‘I will never trust this man again,’” the source said.
The industry really needs to do a better job of rooting these personality types out and ensuring they don't ever end up in positions of trust or authority. Weird how the people who are the most obsessed with loyalty and respect from their staff are universally the least deserving of it.
In the General Ripper mode, by the sound of it.
I probably don't understand something but how will this possibly benefit creditors? Who is going to pay anything for warrants in startups (most of which will fail, since that's what happens to most startups)?
I got tons and tons of outreach from these guys for my company. It was pretty well written didn’t come off as overtly scammy unless you already know to run screaming from an accelerator or any other “investor” that wants you to give them money up front.
And so on. The world is complicated. How did you learn all that stuff and when?
Why should the startups be punished? I think in this case the interests of startup ecosystem should out do those of creditors. Is there no protection for that?? Seems nond to gut startups when an accelerator failed, agains the entire purpose.
Seems a great way to destroy economic value. Tho to be brutal a bag of startups is basically economic destruction anyway, on average as most of them fail...but I mean. In this case it's like precrime, they're killing them before they even have a chance. Not fair, not good!
Why would NewChip decide on this structure vs the more common?
"But startups’ objections were made in vain when the court overruled them. A bankruptcy court’s goal is to oversee the selling of assets to settle debts. If there is money left over, it’s paid to shareholders. Ryan is the majority shareholder."
The accelerator sounds scummy, but at the same time i can't help but wonder wtf the owners of these companies were doing. Did they just not read the contract? If you own a company i think you have a lot of responsibility for the shitty business deals you make. Its not like we are talking about some senior citizen hoodwinked into signing their home away.
That is generally how contracts work. You get something and you give something in return. Nothing comes free. If the deal was better then "the highway", you have no cause to complain when the other side comes to collect their part.
Especially for a sophisticated party like a company. Things are a little different for individuals like employees where the power imbalance is coercive. However when it comes to a company, as long as it wasn't outright fraud, i have very little sympathy that they are having buyers remorse over a bad deal.
This was one of several red flags for me…
Name checks out.
Taking the information in the article at face value, the startups paid the accelerator (partially) with warrants. Those warrants have a fixed exercise price; the courts cannot change that. Whether those warrants are exercised by the accelerator or by the creditors, the dilution will be exactly the same. This is not at all affected by whether creditors bought the warrants for penny on the dollar or for a billion dollars.
Maybe there's some reason why warrant owner matters. But the article makes no attempt to state or even hint at such a reason.
I wish there was a way to blacklist domains from showing up on my Hacker News feed so I don't have to keep reading this type of junk journalism.
> Maybe there's some reason why warrant owner matters.
It's a well understood fact by anyone in the startup world that it does matter, because future investors or acquirers care deeply about the structure of your cap table. Furthermore, the article gives an explicit example of this:
> She had lined up a grant from a bank to help fund her offer, but it ultimately told her no because it was too risky for them to be involved with an unknown warrant holder on her cap table.
A bank is offering her a grant?
And this grant was supposed to remove the warrant holder from the cap table, so why would they have a problem with that?
And having some unknown warrant holder is the reason to shut down?
I call BS.
Spunds like a word salad, or a weekend project for a developer that could be hosted for few bucks per month.
However, the structure has nothing to do with ownership of parts of that structure. Why would warrant ownership matter?
Pretty straightforward.
Investors can create tons of havoc, and “bought equity from a bargain bin outside of a bonfire” is probably as good a warning sign as any.
This still sounds like structure(size and control of a single warrant) rather than who. The real issue seems to be any large warrant, that is, the uncertainty in the structure.
In other words, the original warrant holders (the accelerator) would have happily agreed to the founders buyout offer funded by the bank's grant? Why would they do that, if the whole point of an accelerator is to accumulate shares in the startups?