Hacker News Reader

Comment by RealGeek | Hacker News Reader

Giving up 50% to an accelerator will destory your company. It will make your company un-fundable for any Angel or Series A investment.

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.

View on HN

Well, no, it does, right? The company will just dilute to accommodate investors.

Not that I disagree about 50% being crazy; the problem has more to do with founder incentives, though, doesn't it?

Unless they have anti-dilution provisions as well. Sounds crazy? ERANYC has this (unless they've changed their terms). We were accepted, but turned down their $40k because the anti-dilution was a show-stopper for us.

Can't confirm for ERA but this is standard practice for accelerator programs. 500, etc. do this.

Anti-dilution for someone who owns 3% of the company can make sense. Anti-dilution for someone with 50% or more of the company doesn't.

If 5% of the shares are protected from dilution, that still leaves 95% of shares that can flex.

Does YC do it?

Could someone explain dilution like I'm 5? I haven't researched it much, but I always assumed additional shares would be split between existing shareholders.

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 latter argument is incorrect. Let's say there are 200 shares issued. Let's say you are a solo founder and own 100 percent of the company. Investor comes in and wants 20%. You would issue him 50 shares and that would dilute your percentage to 80%. Total shares issued now is 250 shares.

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

Precisely.

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.

of course you could go "the producers" route, sell 50% for 100k then make such a balls up of it that it doesn't go any further than that initial funding. Take your $100k and use it to fund your own startup. ;)

I don't think you can do that. You can not cash out the $100k you just got as investment, it goes into company's account and remains under company's control. With 50% you not only give up equity, but even control. I believe this accelerator may also ask for multiple board seats. The investor here will have the biggest stake and control of the company.

I think what parent means is mini vacation while you figure out your next move, but I am sure tongue in cheek. Seems like a waste of money and time all around.

This loan shark territory.

It sounds like they want 50% and access to the board, so you are restricted from paying your own salary unless you get their approval.

You're got to wonder what they're thinking--after all they're giving away $100k per startup. Do they really expect any of their members to have a successful exit after giving away half the company?

Their model definitely doesn't fit the industry way of doing things but I give credit to the Lightbank guys for putting something different out there and standing behind it. They have a track record and are investing a lot of their own money. Also, I think they saw how effective their approach with Groupon was and this program may be something where they are trying to replicate what they did there.

That said, this program isn't a fit for me so I don't plan to apply.

Reply on news.ycombinator.com