Documents in the startup ecosystem evolve. For example, convertible note documents are more complex now compared to 5 years ago (e.g., price caps and price cap regulators). Most of the evolution has to do with real-world experiences of investors and startups. Other times complexity can be chalked up to “deal over-engineering.” Some accelerators are guilty of the latter when it comes to the accelerator documents used to bring on a startup portfolio company.
Common Setup for Accelerator Documents – Common Stock or Convertible Security
Most accelerators purchase a startup’s common stock and/or convertible security with a preemptive right attached, which is pretty straight forward. You could probably get everything closed without a lawyer (even though the accelerators typically recommend you use one). But some accelerators burden their portfolio companies with over-engineered deal documents.
For example, your startup shouldn’t have to amend your certificate of incorporation in order to get join an accelerator (who wants preferred stock instead of common stock). At a minimum, the startup will incur filing fees with the secretary of state. The requirements of the accelerator documents in this instance will also lead to a longer time to close the investment, meaning that sometimes the startup’s founders have moved to the location of the accelerator for a few weeks without fulfilling the requirements to get a check from the accelerator.
Consequences of Complicated Accelerator Documents
When accelerator documents get complicated, an accelerator runs the risk of alienating its current and potential portfolio companies. Why lose goodwill from the very beginning? Even worse, an accelerator could miss out on a potential portfolio company because the accelerator document terms seem draconian to the startup. An accelerator’s onboarding process should be as simple as possible in order to attract good startups and get their portfolio companies up and running. There’s thousands of accelerators now and some have their choice of accelerator. An accelerator should be able to protect their interest (using such things as post-closing covenants with fuses) and keep their accelerator documents easy.