Someone recently wrote in to inquire whether the ~6-9% equity stake that most accelerator programs take is worth it. Here’s how you might think about equity accelerator programs, whether you want to participate, and if you really want to give up shares in your young company in order to do so.
Not all accelerator programs are created equal
Whether 6-9% is worth the equity is accelerator dependent. I’ve spoken with several food and beverage entrepreneurs who have participated in cash-for-equity programs, and I’ve participated in a couple myself. Experiences vary.
One startup CEO I spoke with regretted giving up shares in his company; he did not find the cash and program benefits to be valuable enough to justify updating his cap table. By contrast, everyone I know who has gone through YCombinator has nothing but favorable things to say and would do it again in a heartbeat. (In fact, Lisa from Nomiku says: “Best experience of my life.”)
Do your homework and ask good questions
Because not all programs will create an equal advantage, and none are run in the same way, try to find 2-3 entrepreneurs who have gone through the accelerator(s) you’re interested in and ask for their honest perspectives. Plan to speak with startup founders currently participating as well as founders who are now several years out — doing so will enable you to understand both the near- and long-term benefits of such programs.
In evaluating an equity accelerator program, there are several considerations to keep in mind.
These are the questions you want to ask both yourself and the entrepreneurs who have walked in front of you as you make a decision of whether or not to participate in a given program.
Q: Are you getting cash?
An easy way to think about the ~6-9% equity is whether there is any money attached to it. If you’re getting cash as part of a (reputable) structured program, 6-9% is worth serious consideration. Most angels and institutional investors won’t do rounds for any less than 20-30% (and some ask for more).
(Note that not all accelerator programs will ask for something in the 6-9% range; you’ll want think critically about what the offer ends up looking like, and whether it is right for you.)
Q: Do you want the network?
Many people believe it’s often not what you know, but who you know, and I’m no exception. If you’re going to participate in an equity accelerator program, make sure that you’ll be gaining access to a quality network. Who makes up the management team? Who, if anyone, will be assigned as your mentor? What other startups have participated in this particular program? Will participating in the program be likely to help you grow by enabling you to:
- Find unofficial or official mentors or advisors?
- Collaborate with other startups from the program?
- Bring on new partners, suppliers and/or customers?
- Raise money?
Q: Do you need focus?
My personal experience going through Polsky’s Accelerator Program in 2014 — and assisting another company with their operations as they participated in YC’s batch W2016 — is that a good accelerator requires incredible focus for the 8-12 weeks that most programs span.
For the first time — unless you already have investors or thoughtful stakeholders — you will be accountable to others (mentors, advisors, teammates, etc.) for your progress. Most good programs ask you to define and work towards important milestones that will make or break your demo day, if you have one. (You’ll mostly likely want to have one.)
Q: Will you get a needed community?
Being an entrepreneur is usually a lonely profession and most people don’t really care what kind of progress you’re making. A program like this has the potential to give you a temporary (or longer term) community, which might mean being able to talk through important business challenges — or simply getting to hang out with people whose hats are also too innumerable to count and are probably making sacrifices in one or more areas of their lives in order to build a company from the ground up.
Q: Will you be better equipped to fundraise?
Financing payoffs can be either immediate or longterm, or both. If you think you might want to pursue equity financing in the future, participation in an accelerator program can lend validity to your startup, making future financing more probable.
For those looking to raise almost immediately, a good demo day should bring in quality investors, who might be interested in receiving a copy of your pitch deck and setting up time to talk about making an investment in your company.
When to move forward with an equity accelerator program
Will the connections made through the program enable you to find mentorship, funding, or advisors? Will you be able to form new partnerships, collaborate with other startups from the program, or bring on new suppliers and/or customers?
If the answer to one or more of these questions is yes, the program may be worth not only the equity you give up, but also your time, a move across the country, and many of the other tough decisions you need to make about your startup.
Think you might want to apply to a program? Check out my list of food startup accelerator programs to start acquainting yourself with the players in the space.