What to look out for in Accelerator Agreements

For tech startups, accelerator programs can be a great opportunity that comes with some strings attached. From Antler to YCombinator, we’ve reviewed a number of these agreements and want to spend this week covering the most common clauses to look out for. At the end of the day, accelerators are trading their resources for a slice of your company, so it’s important as founders to understand the terms.

Pro Rata Rights

Pro rata rights protect an accelerator’s slice of your company from dilution. For example, if Accelerator A pays you $50,000 for 5% of your company at the current fundraising round, they’d like the right, but not the obligation, to invest in further rounds to keep their slice at 5%. Startups grant this perk to incentivize valued investors, so it’s not given to everyone. For accelerators, it’s common to see them ask for pro rata rights for the subsequent financing round. However, we’ve seen ones that include them indefinitely until IPO or an acquisition.

Most Favored Nation (MFN)

The Most Favored Nation clause means that the accelerator must receive the best financing terms you are offering. For example, if you are offering another investor 5% of your company for $50,000, you can’t offer Accelerator A with MFN 5% of your company at $75,000. Similar to Pro Rata Rights, MFN can be a perk given for a specific round, or last longer.

Board Seats and Company Control

While the ‘board’ for young startups can feel decades away from the drama of Succession, the important thing to know is that a company’s board decides whether or not you can still run your startup. It’s not uncommon for majority investors to hold a board seat, but we have seen accelerators with low investments require board seats. Furthermore, some predatory agreements provide them a ‘special’ board seat that provides majority voting rights. These rights can provide them unilateral control to decide company matters such as fundraising and changing company leadership.

Accelerator Fees

It might come as a shock, but not all accelerators are free. We’ve seen agreements that provide startups funding, only to request some portion of it back as a participation fee in their accelerator. For example, Accelerator A invests $50,000 for 5% of your company and also costs $25,000 to attend. What you’re effectively providing them is $25,000 for 5% of your company. Other examples of such fees is limiting startups to only using, and thus paying for, their partner services.

Additional Agreements

When you join an accelerator, it’s likely that you’re not just signing on to an investment agreement, but also the other rules they’d like you to follow. These agreements can include non-competes and intellectual property rights with broad consequences for your company long-term. You may not be able to join any other accelerator, you may need to run future investments through them first, or you may be sharing company IP ownership with the accelerator.

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This article is by no means exhaustive, but every example provided was a real world case from an agreement submitted to Ask Ginkgo. We hope the takeaway for founders is to really consider what perks you are providing the accelerator, and whether they are on par with the resources you are receiving. Managing each investor’s perks as you raise subsequent rounds can be complicated, time-consuming, and disruptive, so it’s something to limit only to your most valued investors.

For advocacy and beyond,
The Ask Ginkgo Team