Let’s mug a startup founder

http://thinkvitamin.com/business/lets-mug-a-startup-founder/

by pdelgallego • 15 years ago

326 76 15 years ago

suking• 15 years ago

Is it truly a loan or convertible debt?

3pt14159• 15 years ago

Hard to image it being convertible debt if the amount he is asking for is a fixed 6%. "Yes Mr. founder sir, we'd like convertible debt with a cap of £333,333 and just to be nice guys we'll introduce a floor for you of £333,333."

ry0ohki• 15 years ago

From their FAQ (http://oxygenaccelerator.com/accelerator/faqs/):

When do I have to pay the pre-seed funding back?

Don’t worry, we really don’t want you to hand over the keys to your house or car – this is a soft loan. Our interest is in your success and therefore will only look for the loan to be repaid when it makes sense for your business. This will be done on a case-by-case basis.

ovi256• 15 years ago

That's a FAQ, not a legal contract. Is the contract for a "hard" loan ? As Chekov said, don't put a gun on the table in act one if you don't intend it to shoot in act three.

vladd• 15 years ago

It's like saying: give me your house and don't worry, despite the property transfer, I'll allow you to continue to stay there for free; evictions will be done on a case-by-case basis.

phlux• 15 years ago

Not really, Orrick has a startup legal package where they give you a bunch of legal guidance, advice and documents as well as get you incorporated etc.

Typically, its $10,000 or more in legal help. They dont require you to pay them unless you raise at least $500K in funding -- if you crash and burn before hand and your startup falls apart - they do not ask for any payment.

This happened with me in the past - and I would further recommend their services to anyone.

amirhhz• 15 years ago

I read the FAQ and the phrase that immediately popped up in my head was "loan sharks":

- It wasn't at all clear from the website that the money would be a loan - I only got confirmation of this after several clicks to get to the FAQ.

- "Case-by-case" basis? Does that mean if they think someone is going to tank they'll ask for their money back? or perhaps they'll want it back before the next cycle?

- As another commenter has said, the phrase "don't worry" from money lenders makes me feel queasy.

I realise the above points are very touchy-feely but compared to what else is out there, I wouldn't be willing to even consider these guys.

mhd3• 15 years ago

This sounds a bit suspicious to me, i.e. I couldn't help but reading this in a fake Brooklyn/Jersey accent wise guy accent.

How are such loans handled in the UK regarding liability? I mean, if you have a limited company, does one of the founders have to vouch for it with his personal possessions (as it's often handled here in Germany, for obvious reasons)?

Yes, if you're doing good, they won't be hasty in getting the money back, but they just might kick you on your way down, possibly thus ruining your last shot of getting back up again.

forkqueue• 15 years ago

In the UK the liability of directors is limited to the nominal value originally invested (usually £100).

hessenwolf2• 15 years ago

Reason number seven million we are not registered in Germany.

Seriously, though, how difficult is it to get a limited liability going in Germany? Moving there next month.

arturadib• 15 years ago

This is asking for trouble -- it's really ambiguous, and can easily lead to troubled waters in the near future.

Anyone who's lost money in their startup investment knows what I'm talking about. ("Oh yeah, I know it's risky, don't worry" ... "Wait, did you try hard enough? What are going to do, jump ship NOW??")

Their idea of an "evergreen" fund is cute, but it's ultimately flawed. Most startups fail.

lionhearted3• 15 years ago

So that's around $33k USD.

They're only looking to be paid back if you reach profitability.

6% equity to get a $33k loan and some sort of training/advising for 13 weeks at their facility, and office space afterwards? Could be a good deal, especially if you have a new business that requires medium amounts of capital costs to get started. If you're getting something manufactured and your first run/prototyping/etc is going to run you $15k, it might be good to do that on their dime. If it works out and you get profitable, you pay them back and they've got their equity. If it fails, they're out the money.

Could be good, depending on your circumstance and the specific terms on it. I could see lots of cases where that'd add far more than 6% chance of success and value to the business.

Edit: Gosh, a lot of reply comments. To clarify:

-You should always, always read the terms carefully in any important contract you're going to sign, and strongly consider hiring a lawyer to give it a once-over.

-In this particular deal, you'd want to make sure the loan isn't personally guaranteed and what the terms of calling it are.

-I could see times where I'd be ecstatic to take this. Lots of brand new companies would have a much higher success chance and EV with 94% equity, $33k cash in the bank, and $33k in debt with flexible repayment terms than 100% equity, $0 cash, and $0 debt.

-Money's worth a lot, and people often underestimate how much it's worth. Especially for an unproven, speculative venture.

-It might or might not be a good deal depending on your specific circumstances, and the exact terms of the loan. Again, read contracts carefully and strongly consider hiring a lawyer to look it over.

-As always, consider not making flippant comments on Hacker News? It's kind of tiresome to get ignorant and flippant replies when you're trying to do a neutral, factual analysis.

tomstuart• 15 years ago

It doesn't say anything about not having to pay it back if you don't reach profitability. Their answer to "Do I have to pay back the pre-seed funding?" is "Yes".

lionhearted3• 15 years ago

Did you stop reading right there? Here's the next line -

> When do I have to pay the pre-seed funding back? Don’t worry, we really don’t want you to hand over the keys to your house or car – this is a soft loan. Our interest is in your success and therefore will only look for the loan to be repaid when it makes sense for your business. This will be done on a case-by-case basis.

It makes it sound like the loan is to the business - with limited liability, you don't have to pay it back if the business fails.

They say they're flexible on being paid back, and do it on a case by case basis. Anyone doing it should read the contract/loan terms very carefully to make sure there's no personal guarantee and what Oxygen's rights to call the loan are. But assuming the contract terms match the general vibe they've got on their site, it could be a good opportunity. Again, depending on the specific terms and circumstances.

ryancarson11• 15 years ago

The whole reason I wrote the post is because they're acting as if it's normal to ask for equity for a loan (and a tiny loan at that). YC, TechStars, Seedcamp, etc all invest in their companies - not loan them money.

The whole thing smacks of a rich guy who just thinks he can throw around his money, call it an 'accelerator' and take candy from babies.

I'm doubly angry because here in the UK, we're struggling to get support for new startups and entrepreneurs. Shady deals like this only make it harder for people who genuinely want to support startups (like Seedcamp) to gain traction in the mainstream media.

random422• 15 years ago

Slightly OT: You may want to remove hyper-linking to them in the article. You do not intent to promote them, right?

fredBuddemeyer• 15 years ago

fixed price of investment deals are inevitably doomed by the problem of average pricing. only startups that find it a good deal will take it and by rule of nature they are the ones with the least attractive prospects.

(ycombinator can defeat this by continuously manufacturing holy water - just like the old vcs did. the halo effect makes an investment from yc both more valuable and variable than the fixed price on offer)

pauldisneyiv• 15 years ago

Almost all incubators aren't worth the time/equity given up.

My startup applied for YC and (having not made it) will not be pursuing any others. We may apply for YC again, not for the money but the experience and the alumni.

Experience and Alumni.

repoleved• 15 years ago

This is an interesting post from an unlikely source. I think carsonified Wil soon be the Arrington of bullshit startup advice. Just trying to peddle those CSS3 How To Videos...what a joke.

ryancarson11• 15 years ago

I guess the fact I've started four companies doesn't count :)

- One acquired - One failed - One currently humming along profitably - One currently growing at an insane pace (thankfully!)

swombat3• 15 years ago

Don't feed the trolls! :-)

commondream• 15 years ago

Dude, you're rewinding all the work I've done on trying to tell others how amazing and friendly the web community in Greenville is. How about some substantial examples about Carsonified's bad advice instead of just trashing us?

brown9-2• 15 years ago

repoleved is unwinding all of your work with a single messageboard comment?

matthewlyle• 15 years ago

What's the joke?

nhangen• 15 years ago

Completely uncalled for.

llambda• 15 years ago

I have seen this domain spammed to various link aggregators many times. I too am surprised to see content that exceeds a link to an off-site design tutorial. Thank you for the original content Mr Carson. I hope we see more posts like this in the future.

meow• 15 years ago

The loan clause is tucked away under FAQs instead of next to the 20k amount on homepage. How convenient... pickup that bat timmy.. hit him square on his head... :)

kesun421• 15 years ago

Sometimes I wonder if the guys who are providing the hosting, logo, font and design services are the ones making the money, not the startup founders. Web startups can depend on many paid services to make a web app work, yet not sure if their own web app can make money at all.

gerner2• 15 years ago

If you want to make a good living with little risk, be a dev, a designer or something like that. Given that most startups fail, and of the ones that don't, most are only modestly successful, you'll probably be better off (from a purely economic standpoint) as a paid employee (or service provider) to a startup than as an entrepreneur starting one up. I think there's something magical (insane?) about doing your own startup.

Note: I don't have the hard data about this, but this seems to be the consensus (although those people never presented their data) and my anecdotal experience. Please, tell me if I'm wrong :)

truthtechnician• 15 years ago

Except the founder gets paid either way, and paid more than anyone else usually. If the business goes bust nobody takes his house, or his things - he just finds another job or starts another business with VC welfare.

omouse• 15 years ago

I don't get it, isn't the 6% basically the interest rate?

ryancarson11• 15 years ago

No, because if any of these startups make it big, it'll be 6% of a much larger amount (think $10,000,000+). $600,000 is a little more than the interest you'd pay on a $33,000 loan at 6% :)

tlrobinson2• 15 years ago

As someone in the comments on the article pointed out, oxygenaccelerator.com is scraping the top link on Hacker News, so they're actually linking to this article on their homepage. Hilarious.

Screenshot: http://i.imgur.com/GCYCG.jpg

tlrobinson2• 15 years ago

I'm having a hard time understanding why they want the money back if they're taking so much equity. If the company is at all successful the 6% equity will be worth wayyy more than £20,000. If the company fails they get nothing, not even the loan repayment.

I suppose it protects them against so-called "lifestyle businesses" that never have a big exit.

ryancarson11• 15 years ago

Supposedly it allows the money to be recycled back in to the fund. This might make sense if it was in the millions but as you said, it's a very small amount (in investment terms) so that argument seems strange.

edanm• 15 years ago

Even with companies that have an exit, it might take years, during which the companies could well afford to pay back the money.

mcdowall2• 15 years ago

I am surprised they managed to get the loan via the Small Firms Enterprise Loan Guarentee scheme. I don't know any web based business that has succeeded yet, most bank managers authorise the loan as the guarantor provided you have enough equity yet in experience lack little web experience and equity in a property.

I am citing from previous experience, when pitching a travel startup to a Natwest 'business' manager his response when I expressed a point about Expedia was.. "who are they?". Enough said.

ryancarson11• 15 years ago

We had the same experience with Natwest. Our events business was doing over £1m in revenue with them, for over three years - and they still turned us down. They seemed completely aware of a recurring revenue model. Insanely frustrating.

I just hopped on the web and Googled 'small business loan' and came across Lloyds. I filled out a random contact form and amazingly they got in touch. I had to prepare a traditional biz plan and present it. Because we bootstrapped the startup and revenues showed constant growth, and I was confident in my pitch, they got back to me next day and said they'd do it. Wasn't easy but it worked.

mcdowall2• 15 years ago

Congrats!

It does irritate me that the UK government bleat on about making business finance readily available then you end up face to face with the likes of Natwest!.

Reading articles about the startup program in Chile and the building of a tech hub in Portugal I do wonder what happened to the innovation in the UK business sector, if the Startup UK website was anything to go by it's gone.

braindead_in• 15 years ago

In the Indian startup I hear of a new incubator/accelerator every few month. Of course, they don't give any money and yes they want equity. Its the hottest scam it seems these days.

halesmark3• 15 years ago

Hi – I’m Mark Hales from Oxygen Accelerator. I just wanted to say we’re following all the discussions on here and it’s helpful to hear your opinions and advice based on your experiences. I just wanted to make a couple of points to clarify a few things. We intend to provide a fuller response once we’ve spent some time considering all the feedback.

First of all the loan we are talking about is a ‘soft’ loan to the businesses taking part – with no personal guarantees and will be interest free.

As part of the application process we’ll sit down with each team to understand their funding needs and will only ask for the loan to be repaid once / if this level of funding or more has been achieved, or they reach a level of profitability to support loan repayments, again we will agree this in advance but the key point here is that we will build in an agreed level of headroom with the founders.

This will not be a complicated loan agreement, we only want to have the money back to reinvest in the next round of entrepreneurs when its right for the business, i.e., there wont be any clever call options. Teams will be given full sight of this and we will encourage them to get advice before they sign up to anything.

swombat3• 15 years ago

Thanks for jumping in to explain. I appreciate it's not always easy to take part in a discussion that's mostly focused on ripping you to bits (justifiably or not). I for one look forward to see how this evolves, rather than judging everything on the basis of what it looks like on day one. Actions speak louder than words.

halesmark3• 15 years ago

Thanks swombat, I welcome constructive feedback, but have been a bit taken aback by the nature of some feedback, the best way to engage Entrepreneurs and investors outside of the tech community is to work with them and provide constructive feedback, I'll keep listening

ryancarson11• 15 years ago

Mark - the trouble with your accelerator is this: It's a deal that not even you would've taken when you first started.

To promote it as "Breathing life into tech startups" is irresponsible.

chernevik2• 15 years ago

It seems you are saying "we'd like to recoup cash from our companies, if possible, without forcing them into premature dividends or exits, and without diluting our equity." Yes?

Well, that is a preferred equity instrument, eg, "This bit gets paid before the common equity gets a dividend or distribution."

Preferreds generally have a stated "interest" rate, but payments are at management discretion (accruing to principal when not made) but there is no reason that can't be zero. They can also have maturity dates for repayment. Yes, it looks a lot like a loan, and that's sort of typical for this "junior to all other obligations / senior to other equity" layer of the capital structure. (And note that there could well be legal and tax differences between preferred and debt. I don't know how it complicates the documentation you're already doing with the loan and equity pieces. IANAL.)

The important difference for you is jargon. "Preferred equity" doesn't carry a suggestion of personal liability, it's equity with a return clearly tied to the venture's success, but ahead of the common. Your founders won't know the term, but any advisor they speak with should.

Described thus, I still don't know if I like your proposition, or what others should think of it, but I'm closer to understanding just what that proposition is.

tptacek4• 15 years ago

Ryan, I assure you that in the US, a typical startup founder cannot walk into the bank and leave with an unsecured $163,000 loan. Businesses with many multiples of that in top-line revenue can't get that loan without personal liability.

I probably agree that 6% PLUS a $32k (zero-interest) loan is not a good deal.

But I don't even think 6% for ~$20k is a good deal for funding.

I don't think the comparison you're making here is fair. Calling it a "mugging" is a bit over the top. The people who mug startups are consultants and do-nothing executive hires.

ryancarson11• 15 years ago

The typical lean web startup doesn't need £100,000 as seed funding. I mentioned our 0% equity loan because it demonstrates what a terrible deal this accelerator is offering.

tptacek4• 15 years ago

Loans and lines of credit often don't require equity. They frequently do require you to put up your house. You cannot pull an interest-free loan, backed only by your corporation, off a tree. It is a real offering. It is not reasonable to call it a "mugging".

We agree on how valuable $32k of seed money (debt or equity) is worth. To wit: not much.

We agree on how expensive 6% of your company is worth. To wit: a deceptively large amount.

We agree that this seed program is probably not a good deal.

I just think there's a difference between "probably not worth it" and "bad virtually to the point of criminality", which is what the wording you used meant.

keeptrying• 15 years ago

This is an european phenomenon. I remember reading about one seed fund in europe that took like 50% equity of your equity.

cliftonmckinney• 15 years ago

So let's say that the hit rate for follow-on investments for a TechStars company is somewhere close to 70% (that's fairly accurate). That doesn't necessarily represent success, but it's a start. Y Combinator is probably better than that. Now let's say that a "lesser" accelerator's hit rate is maybe half that. Still a 35% chance of some measure of success. Now maybe there's a 10% chance by going the pure bootstrap route, maybe less. So taking the money--and the guidance--in whatever form, makes you maybe three times more likely to be able to do what you love for a fairly extended period of time. Not to mention the fact that oftentimes the accelerator provides free or discounted services for being a cohort company. Good legal for a deep discount, legal office hours, design consults, dinners with VCs, etc.

I can't speak for what Oxygen is doing, or whether they're providing these services or not. But many accelerators that aren't called Y Combinator or TechStars are, and though there won't be as many successes to come out of those, there no doubt will be some. There may even be one or two who attend, learn a bit, fail, and then come back to apply at one of the big dogs later down the road.

rudeboypeter• 15 years ago

Also, don't forget that if the company goes into liquidation, debt gets preference to equity holders when it comes to distributing assets. So for all the "trust me" rhetoric, it remains theoretically possible that the creditor (ie the "incubator") could call in the loan, and if the cash is not at hand, they could force the company into liquidation. They would then end up with title to any IP, contracts or any other company assets.

halesmark3• 15 years ago

It looks like we have raised some controversy and questions around the funding model we have chosen for Oxygen Accelerator. So this blog post is in response to some of the questions/points raised:

Q. We could just go get a bank loan and not have to give up any equity?

A. It is true there are alternative sources of funding including bank loans through the government supported Small Firms Loan Guarantee scheme; this loan is only available to companies that can prove the ability to repay it, however these loans charge a facility fee, are interest bearing, have fixed payment terms, and the founders are required to give personal guarantees. The 70% guarantee made to banks by the government only kicks in once the personal guarantees from the founders have been exhausted. Our loan is interest free, has no fixed term, is secured only against the business, does not have any personal guarantees and is only repayable if and when the business can afford it without jeopardy to the business. If the business fails (which inevitably some will) the loan is written off. It is made at a time when in most cases the founders have an idea; they may not have incorporated, may not have a business plan or even a well thought out strategy.

Lots of people have understood what we are offering – here is a comment on HN from ‘lionhearted’ which sums it up well.

“I could see circumstances that I’d take this deal in a heartbeat – starting a brand new company with 94% equity, $33k cash in the bank, and a $33k loan with very flexible repayment terms seems like it’d have a much higher chance of success than starting with 100% equity, $0 cash, and $0 debt.”

Q. Isn’t 6% equity for a 20K loan a ridiculous interest rate?

A. The 6% of equity is not directly related to the £20k. The 6% equity is in return for the full programme, including aftercare. We are enabling companies to reach an entirely new level, through the provision of facilities, mentor guidance, accommodation, investors, an evergreen loan and office space for 6-months – plus we will keep a vested interest, providing an open-door policy to the team in Birmingham. An important point is that it’s a loan of UP to £20k – purely to enable the teams to get onto and through the programme. It is not seen as an investment to last them post-bootcamp, but allows them to reach ‘investor day’. They don’t have to take this loan if they don’t require it.

Q. Why wouldn’t I just bootstrap rather than taking a loan?

A. Bootstrapping is a great way for a startup to get off the ground, but often requires the founders to take on debt via credit cards or loans from friends and family which also have to be paid back. The difference here is we are offering a programme (facilities, mentor guidance, accommodation, investors and office space for 6-months) that includes an interest free loan to your business with no personal guarantees. Here is a HN comment from tptacek

“Loans and lines of credit often don’t require equity. They frequently do require you to put up your house. You cannot pull an interest-free loan, backed only by your corporation, off a tree. It is a real offering. It is not reasonable to call it a “mugging”.”

Q. I’m having a hard time understanding why they want the money back if they’re taking so much equity.

A. Typically it takes 3 years + to get a return on an equity deal so if you are running an accelerator at least once a year you need to be able to fund it for at least 3 years before getting (3 * £200k = £600k + running costs = £1million) any return. By using an evergreen loan model we stand a chance of returning some (not all) money to the programme quicker than 3 years and allowing us to sustain the programme and support more entrepreneurs which has to be a good thing for the entire community.

Q. If we make it big it’ll be 6% of a much larger amount (think $10,000,000+). $600,000 is a little more than the interest you’d pay on a $33,000 loan at 6%?

A. The type of high-growth tech businesses we are looking to support on the programme will need additional rounds of funding and therefore our 6% equity will be significantly diluted. It would be great to think that all businesses will exit for $10million + but the reality is very few will so the return is unlikely to be anything like that.

Q. Not all accelerators are equal

A. I agree and not all startups are equal and what works for one doesn’t always work for another. I don’t seek to compete with Tech Stars, Seedcamp, Y combinator or any other scheme. I applaud their efforts in what they do for aspiring entrepreneurs; any reference I make to them is around the fact that we are offering a 13-week bootcamp that is mentor intensive in order to assist companies in raising their next round of funding.

Q. This is a rip off for startup founders who don’t know any better.

A. I think this does the tech community a dis-service. The vast majority have a very good understanding of these matters and are more than capable of weighing up what is the best programme for their startup. The fact that this is not an identical offering to other accelerators does not make it a rip off, it makes it different.

Q. The loan information is buried in the FAQ’s

A. The FAQ’s are hardly buried they are very clearly displayed on the Accelerator page. All the accelerator sites use the FAQ’s to provide the detail around their programmes. However, to ensure its very clear we have added the words “soft loan” next to the £20k on the home page.

Q Why don’t we just get Angel or VC investment?

A. There are a lucky few startups that turn up and pitch an idea to an Angel or VC and get funding but there are more that are not that lucky and have to actually prove traction, have a credible business plan or be revenue generating. What accelerator programmes like ours do is help your startup get to that stage quickly (13-weeks), which means you are much more likely to then find the investment you need to grow the business to the next stage. Of course this is not the only way to become investment-ready; there are plenty of others and only you can make the best choice for your business.

Q. There are lots of accelerators why do we need one that offers loans

A. My experience is that there aren’t enough accelerators to support startups and many talented individuals with great ideas fail to get the support (financial and non-financial) to get their ideas off the ground. My programme is aimed to support those people that see the value of the programme; if they need neither the money or the support because they have all the skills and connections to go it alone then clearly they wouldn’t benefit from the programme. The fact that hundreds of people applying to Tech stars, Y Combinator and other accelerators aren’t successful suggests there is a need for more support to be provided (YC probably got 1000+ applications and selected 60 teams, so that’s 940 teams who will not receive support this year alone).

The rationale for it being an evergreen loan is so that the ones that do repay the loan, at a time when arguably they no longer need it, is to allow other entrepreneurs the same opportunity for the long term. Other schemes such as Difference Engine were funded by regional grant type funding which, as government cash ran out, were closed and therefore no longer open to budding entrepreneurs, despite the fact that many of the companies that benefited from the programme have gone on to successfully raise further rounds of funding with the assistance of the programme and arguably don’t need the original funding anymore. Our aim is to make the programme sustainable and not at the whim of investor sentiment. The evergreen loan model in theory returns money back to the programme quicker than an equity-only model and hence allows us to support more entrepreneurs.

Mark Hales http://oxygenaccelerator.com/blog/2011/05/oh-no-its-a-loan/

Let’s mug a startup founder

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