Incubator Funding Documents Should Be Easy

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 incubators are guilty of the latter.

Most incubators 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 incubators typically recommend you use one). But some incubators 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 incubator (who wants preferred stock instead of common stock). At a minimum, the startup will incur filing fees with the secretary of state.

When the deal terms get complicated, an incubator runs the risk of alienating its current and potential portfolio companies. Or worse, they could miss out on a potential portfolio company. An incubator’s onboarding process should be as simple as possible in order to attract good startups and get their portfolio companies up and running. And an incubator should be able to protect their interest and keep the deal documents easy.

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