Accelerator demands I use their costly lawyer

David Austin Relentless problem solver and innovator.

Last updated on March 28th, 2018

they'll kick me out unless I incorporate through their guy at $1500 - $3000. I expect when all is done it will be the $3000 Mark. I can do it myself for $300. The fee is typical for McCarter and English, who is their firm, so not costly for a personal attorney from a pedigreed law firm, but compared to $300, not chump change for a bootstrapped startup.

It's a good accelerator (freedom from cancer startup challenge), they provide stream of great video feeds (done live, 1 per week forthe last 4 months offering the best guidance I've seen for startups, and I've been doing startup for 15 years. I understand why they're doing this ... To provide investors with confidence that the articles of incorporation and investment instruments (YC SAFE) are fair and investor friendly.

Part of my issue is I'm required to adopt articles of incorporation that may not be in the entrepreneur's best interest. I don't know ... I've got to comb through the thing and I'm moving this week and don't have time to do that. And I don't have that $ just lying around. Been bootstrapping my startup for over a year and cash is king.

And they just informed me last weekend I need to pay it or I'm out. First time I hear of this.

A Part of me thinks they don't want me. They know my startup (see if they're this fickle then my startup must not be highly valued. So it seems.


Jeff Dayton CEO and Founder of Alpha Funders, the premier board and advisory services firm to top founders

Last updated on April 1st, 2018

Hi David. Accelerators can be very predatory. Most add a little value but not a lot of value to you long term and they are very, very expensive in terms of equity and warrants. They know that many startups will fail and will take what they can from them. To your question....first, this demand is unreasonable, period. Did they disclose it to you? If not, challenge them. If this requirement is in the deal docs you signed with them, then you are hung. If this "demand" is not in the legal docs you signed with the accelerator, then explain to them why their demand is unreasonable and you do not have to comply. In this case, they have no basis to kick you out and should be called out for lack of integrity, transparency, and potential conflict of interest. If however they can require you to comply contractually then ask the accelerator to hurry up and help raise the capital to pay all of the fees they've imposed. You can be fairly confident that the law firm they are requiring that you use, at a premium price, gives them some legal advice or some side benefit to the accelerator. There are a lot of law firms that can do this fine and for less. There are many online resources, as you suggested, where you can get solid, boiler-plate corp structural docs for cheap. The accelerator may be genuinely trying to keep you from hurting yourself but if that is the case, they would just give you some template docs. They are more nearly trying to protect their equity/warrant position in you by assuring they can help control your corp and cap structural docs. It is probably more in their self-interest. I noticed you mentioned "investor friendly SAFEs". SAFEs are not liked by investors. They want preferred or convertible. They do not like common or SAFEs BTW. Reach out to me offline if you have additional questions.

Dane Madsen Organizational and Operational Strategy Consultant

April 6th, 2018

I have advised many firms how to clean up legal/organizational/governance/IP/HR/operational messes after they decided to "do it themselves" or get the "on-sale" legal adviser. I will guarantee that at my rates, they wish they had done it right the first time. I presume you would not buy technical services from a lawyer. Before you dismiss their firm, ask them to help you understand why they cost what they cost, and what services you should expect.

Michael Sick Marketing Consultant & Entrepreneur - President at Sick Performance Concepts

April 29th, 2018

I have mentored a couple dozen companies through the Connect Springboard accelerator in San Diego which counts on large law firms for much of their sponsor support and while companies are encouraged to engage with the sponsor law firms, they are not required. There are many advantages to have a big name law firm on your side when you start talking about term sheets, licensing, M&A etc. but your concerns about cash flow are legitimate. I am aware of a number of start ups that have had substantial amount of work done by these firms who deferred their fees until a future raise. While not every start up will be successful, the law firms only need a portion of them to turn into lucrative clients to justify a few write-offs. Find a law firm that believes in what you are doing and wants to be part of your future success.

Whitney Kramer Manager of Analytics at Iora Health

April 1st, 2018

Go with your gut on is king.

BTW- If you're forming a c-corp, I'd highly highly recommend you check out Gust Launch. It's a David Rose brainchild to simplify all these admin activities so you can focus on building your business. + there are a slew of perks that pay for themselves -- $15K in AWS credits, Sendgrid credits, 1hr/mo of legal help, etc..

Matt Lawrence Founder, Shipper Hero

May 1st, 2018

The only reason I clicked through the email was because of this crazy answer:

"Gerald Reihsen Aggressive & innovative business building, deal-making, capital raising entrepreneur & consultant
Apr 29David:
You clearly have little experience in business and little understanding of the need to structure things carefully and strategically from a legal respective from the very outset. Don't ever let the incubator know you wrote this as it reveals you as an unsophisticated, penny wise and pound foolish person - not the kind most would want to invest in. Sorry to come down hard, but truth sometimes hurts. If you want to know more feel free to contact me directly."

My god, what a nut job! I personally can't contribute anything more to this discussion than has already been said, but I was just going to say please don't listen to that crazy guy. Not sure how wanting to shop around for legal fees makes you "unsophisticated." With friends like these... Anyway, glad it worked out for you. Good luck!

Luan Muniz CoFounder of Zimp, Financial Developer!

March 30th, 2018

Well, you have a decision to make, you need to see if this extra cost beats the cost of not be in the acceleration program.

I will say this:

  • Accelerators usually include this kind of thing in their package, although is normal for companies in due diligence to ask you to use their accountant/lawyer firm.
  • Golden pens are good! Most of the times the extra cost buy extra external confidence as well. I had to do this a few times over my startup life and it pays off.
  • In the past i hit the phase where to get an investment, i had to guarantee the VC security myself and that cost money. You need to spend money to get money. Golden pens are to VC investments as a Pitch is to startup challenges.
  • For investors, see that you are willing to go the extra mile to make sure they are safe is a good thing.
  • At the end, ask for something to sign. This "First time i hear about this" is not a good sign, protect yourself
  • The "if they're this fickle then my startup must not be highly valued" is bullshit. It doesn't matter how good a startup is if the founder doesn't listen when he should. If you were already a few stages ahead the conversation would be different, but at the phase you are in the ENTREPRENEUR is the most probable cause of fails.
  • Either way, you should talk to them! If you impression is that they don't want you there, tell them that. Even if you pay the y, if they don't want you there, it will all be in vain.

I hope my comment was a little helpful.

Paul Garcia marketing exec & business advisor

April 1st, 2018

Accelerators are typically invested (with hard dollars) in the startups they choose, and they don't typically choose startups, they choose early stage businesses. It doesn't sound like your incubator is typical of an accelerator and I'd be quite suspicious at this stage that they're calling themselves that if they're outside the standard. If you aren't incorporated yet, typically an accelerator wouldn't consider you. If they're asking you to spend at a high rate, it's suspicious, because accelerators have a higher stake in the outcome of the program and don't want to injure companies by adding expenses.

If you're stuck, my suggestion would be to create your documents yourself, and then allow the program to review your documents with their own firm at their own expense. But as it stands, it sounds like you're not enrolling in an accelerator program with trustworthy credentials. Accelerator programs are sometimes much harder to get selected into because of the seed money that comes with the deal.

Here's what the incubation landscape looks like nationwide:

Type 1: Incubator programs (source: InBIA)

12-18 months

Focus on longevity

No investment

Can be almost any business model

Limited mentorship

No clear path to funding after program

Typically only for startups

About half have an association with one or more institutes of higher learning

62% a non-profit, 25% are higher ed., 10% are governmental

43% are limited geographically to one city, 4% national, 8% international

8x more common than accelerator programs

Between 400-500 programs nationwide

Type 2: Accelerator programs (source: Seed Accelerator Rankings Project)

12-16 weeks, exist as a small subset of incubator programs that include seed money

Focus on solutions and mentorship due to stake in the outcome

Includes investment for equity (average $25K for 5-7%, avg. from $0-150K)

Required to be fast growth business model

Average age of program is 4 years old

Average value across all portfolio companies in accelerators $17M

Top industries in 2017 were AI, Real Estate, and Transportation

Typically for very young companies

Jack Cocio Founder Looking for Co-Founder

April 30th, 2018

Short and sweet:

Check out Clerky. Streamlined incorporation program for startups. Associated with Y Combinator.

It is not that they don't want you, its that they have leverage on you. If you were snapchat you would have leverage on them and could call the shots. Everything in live is about leverage even when you think it isn't.

Take the clause that you don't like and google it. You will find other people who are having the same problem.

On YouTube or Podcast, search "Y Combinator Legal and Accounting Basics for Startups". It gives very good advice;

Best of luck!

Steven Fried Founder, CEO, and General Counsel

April 1st, 2018

It's a bad deal. As a lawyer who has worked with entrepreneurs for 22 years, being forced to use one firm or one package to incorporate your business indicates that the accelerator and law firm are more interested in profit than in providing a service textured to your particular needs. You may not need all of the services right now, or there may be alternative strategies better suited for your business. If the idea is to bring your business online and make it profitable more quickly, foreclosing all options except a generic 'one-size-fits-all' plan sounds like a racket.

David Austin Relentless problem solver and innovator.

Last updated on April 28th, 2018

So I should have visited here a couple days later, and then I would have received all the contrary insight to Luan's suggestion that my concerns were "bull***" and that "ENTREPRENUER is most probable cause of fails" (may be true, but I'm not sure how that's relevant).

It's nice to know has a little more depth than that. Thanks, guys, you have renewed my faith.

On further discussion with the accelerator I've learned that those who make it through all phases have these costs reimbursed, which kind of changes everything.

See, I told you they were a good accelerator.

That said, something is seriously wrong with the startup ecosystem if it is normal for accelerators, or for incubators, to burden bootstrapped startups with $3k out of the gate when comparable startup docs and registration could easily be done with via template (that investors can approve) for $2500 less.

I get the reasoning that the incubator/accelerator wants to grease the skids with investors and using McCarter & English helps do that. The accelerator should have a bargaining position with the lawfirm though ,whatever lawfirm they use. As I understand it, McCarter & English claims to be giving a break, but it's nothing compared to Gust Launch.

I was aware of Gust Launch a few months ago (thanks for the reminder Whitney) ... it's really an unbeatable service, and they contract with some major lawfirms to provide 1 hr/mo law advice to participating startups (including McCarter & English). It seemed like it was a good deal when I checked in out a few months ago at $99/mo. They've since dropped their price by about 75%. Accelerators and incubators should use Gust, and investors need to work with Gust to insure the startup docs are as good as they would get from a "golden pen" firm. Especially if they could get endorsements like "Keiretsu Forum, the largest Angel Network, recommends Gust".

Cash is king, and although words are important since they become law, who writes them should not be a deciding factor. Words are words and the law is the law. Startups should not have to pay $700/hr for founding documents. I'm grateful I'm working with an organization that gets that reimbursed for the winners. But still ... things need to change.