We're new, have half of an idea, and no track record. Should we consider applying to them? (We are, of course, applying to the famous accelerators).
Series A investors typically want 30% to 35% of your company. If you have already given 50% to an accelerator, there is no room left for another investor.
You and your co-founder will loose motivation to work for the company. Let's say you give 50% to the investor, create a 20% options pool, and split rest of the 30% with your co-founder. Fast forward 1 year where you have 15% equity, your company is out of cash and unable to obtain next round of funding, and you are sleeping under your desk to run the company. You will have no motivation to continue working for the 15% equity you have, and will eventually give up.
This loan shark territory.
Not that I disagree about 50% being crazy; the problem has more to do with founder incentives, though, doesn't it?
If 5% of the shares are protected from dilution, that still leaves 95% of shares that can flex.
For example, let's say there are 10 shares in a company, and I own 1. We decide we need 100 shares in total. Dilution makes me think 90 new shares are issued, and I still own 1, bringing my ownership down from 10% to 1%. However, common sense tells me if you issue 90 new shares, since I already own 10%, that means 10% of the new shares should belong to me. So, I now have 1 + 9, or 10/100 shares, remaining at 10% ownership.
Why is the above not always the case?
Your shares don't change and you don't just get issued new shares. That's why in startups people reference actual shares of stock rather than percentages. Percentages is just a way for people to communicate. That said, in an actual startup we're talking about tens of thousands to millions of shares initially rather than this dumb down version.
As for why your version isn't always the case, it's obvious that if everyone shares get increase accordingly, and retain their percentage ownership, there'd be no new shares/percentage going to new investors of employees
We cover this issue in our blog:
http://www.indexventures.com/blog/index/post/860
Typically a post-series A company's cap table will be 20% to Series A investor, 20% option pool, 40% founders and 20% seed/angel.
Having seed investors own substantially more or founders substantially less causes lots of problems further down.
That said, this program isn't a fit for me so I don't plan to apply.
Accelerators aren't primarily about money. They're coaches helping you across hurdles from the minor leagues to the majors.
A multiplier of 1.5 - 2.0 is common when you bill out, to account for offices, chairs, electricity, health insurance, etc. And it isn't just software, actually it is often higher in other fields: an auto mechanic might make $25/hour and be billed out at $75/hour.
So $100k will get you ONE run-of-the-mill Java programmer for 6-9 months tops.
This accelerator is just looking for idiots.
http://money.usnews.com/careers/best-jobs/software-developer...
But yeah, 50% for 100k is a really bad idea.
The founder is no less than Eric Lefkofsky, CEO of Groupon!
As another commenter suggested, consulting can be a good way to make money to then bootstrap the company. Another option is to enter competitions which isn't guaranteed money, but I know some companies have been initially funded by competition prizes.
There should really be an alternative. Something where we could just help each other out. That's why I'm making a club... it's called Indie Developer Club. I just had the idea this weekend so the website isn't operational yet, but anyone can send me an email if they like the idea and want to join.
In Seattle, I encourage veryone to join SURF.
If more than 10 people join there will need to be more than one regularly scheduled Google Hangout, so it makes sense to break them up by geography. I just have to make a system that let's people add their own Google hangouts to the system and let other members RSVP for them.
Even if you are successful, you will end up with nothing. The investor will dictate subsequent terms, you will be diluted severely, and you will have poor liquidation terms.
Don't waste years of your life with these losers.
On a side note, Lightbank has screwed around with investing in quite a few companies I've heard of. They are as arrogant and incompetent as the terms they demand imply.
You are going to be doing the hard work of running your company. An investor who wants to take 50% or more of your company is saying, "I want control."
They may argue that the deal provides opportunity to technical founders. I would argue the deal is unethical and exploits unexperienced entrepreneurs.
Source PG @ Launch Festival: http://www.youtube.com/watch?v=0rVpAKziQJA&feature=share&t=1...
But notice the phrasing: it's quite clear that what they're doing you is hiring you to work in a company that you will help to create.
1. You take the money and startup fails, investors lose 100k, you lose time. You prob won't realize your failing for longer because you have 100k and so lose more time.
2. You are wildly successful, Lightbank control your company and 50% of everything the business earns for life. The 100k is probably a minimal factor in your success can you live with that?
The only way it would make sense financially is if you're spending all that $100k in the first year on founder salaries; but at the end of that you've got a company with no cash that's probably not yet selfsustaining.
I'm surprised it's still going.
First, what does Lightbank offer to your business? Do they have network connections that will actually help you? Do they have mentorship which actually fits your problem domain? Do they have customer connections for your first market tests?
Second, what do you need the money for? What do you need to spend it on? That will barely pay for a fulltime engineer and a saleperson, including healthcare and excluding salaries for the founders.
EDIT:
Why not check out Startup Chile: http://startupchile.org/about/the-program/
~$40K in equity-free seed funding, and all you have to do is be part of their community for a few months/a year. It's basically a paid vacation to try and be a startup.
It's a lose-lose business model. Whenever transaction happens - someone loses.
Do you need the $100k ? Like do you really need it.
I've heard that Genentech got started with about $250 grand. And that's medical research that led to changing the world.
Unless you're doing something bigger than what these guys did, I doubt you really need the money.
It seems awful to me, just because you could consult and make good money (not 100k, but 60k between the two of you) and bootstrap and then own 100% of your company.
Note, I ran a solo consultancy for a few years and have been part of a couple of failed startups, so make sure you don't forget the salt.
Off the cuff, 50% sounds like a bad idea.
Just for reference, Kima15 offers $150,000 for 15%.
www.kima15.com