Sat, Jan 26, 2013
It’s funny to see how hot & hip incubators are these days. Everybody and their dog either wants to join or run one.
It’s kinda sad to realize that most startups don’t seem to do the math.
Let’s take your run of the mill incubator (and please note that I am explicitly not speaking about the likes of Y Combinator, Tech Stars, 500 Startups, Seedcamp or some of the newer kids on the block like H/C Co-op — they are essentially black swans in a sea of white).
What you get from your incubator is usually (with an estimated dollar value):
So it comes down to a bit of money, a desk in a co-working space and some books. For that you happily fork over 7% (and often more) equity.
Now lets do the math in reverse.
Say you go through the incubator and pay your 7% club membership fee. You go on and raise a seed round which will dilute your company by 25%. You’re awesome, work hard and get lucky — you raise a series A. Your stock goes down another 25%. And then you exit. Hooray — you sell the company for a neat little $10M. Let’s see how much you paid for that help your incubator gave you, shall we?
Assuming simple dilution in each round your incubators 7% are diluted down to about 4% (3.9375% to be precise). That’s $400,000 in hard cash for a little more than $13,000 they put into you. 30x their investment. Not bad for them. But is it really that good a deal for you?
Note that reality often looks much messier and you (as the founding team) will end up with significantly less stock than in the simple example above. And suddenly 4% becomes an awful lot of stock.
With that being said — here’s my two cents: Incubators can be worth the money (heck — if I would get a spot in YC I would take it!) but do the math. And think hard about giving away your equity — these are the bargaining chips in your startup. Guard them carefully.