Accelerator Equity: Everything You Need to Know
Accelerator equity allows investors to contribute directly to a company while arranging for stock conversion after the investment has been made.3 min read
Accelerator equity allows investors to contribute directly to a company while arranging for stock conversion after the investment has been made.
Accelerator Contract for Equity (ACE)
Also referred to as an Accelerator Contract for Equity (ACE), this instrument facilitates a direct investment to a company. SOSV, a venture capital and investment firm, started the process of using an ACE, which allows the investment to be converted to a class of stock later. The ACE is useful to early-stage companies that need to grow quickly, rather than going through expensive and time-consuming administrative and legal hoops. It's a straightforward and user-friendly document.
This type of legal agreement is similar to a convertible loan note (CLN), although it doesn't require interest or the company to take on debt. Therefore, the terms of an ACE generally don't include repayment requirements, unless the business is dissolved or liquidated. One similarity an ACE shares with a CLN is the requirement to convert the investment to equity in the business at some point. When certain events occur, the ACE should be converted to a class of stock.
Before you start the process of an ACE, you need to make sure you understand when and how the terms of the agreement allow the investment to be converted to equity in the business:
- Upon conversion to the same class of stock issued during the financing process, the ACE terms will convert under the same terms as the equity financing
- Upon conversion to common stock, as long as equity financing doesn't happen within 12 months, the ACE will convert based on the investor's option
What Are Startup Accelerators?
The purpose of a startup accelerator is to allow portfolio companies to grow more rapidly. This manmade option can include office space, mentorship, an innovative community of like-minded people, and access to technology, all packed into a short period of time. An accelerator transforms the concept of starting a business into a repeatable function, churning out successful companies through an assembly line-style setup.
Although accelerators have their own nuances, all programs have some common threads:
- A startup founder would apply to be part of the program, lasting for several months
- The founder would receive funding, mentorship, and office space
- The founder would give up stock in the business in exchange for these resources
An accelerator program is designed to give new business owners more opportunities while earning high returns on investments. One of the original accelerators was Y Combinator (YC), and their idea certainly seemed to have been successful. This organization sprouted Dropbox and Airbnb, two startup companies that are now worth billions since the program was incepted in 2005.
A variety of organizations are now trying to repeat the success of YC by launching their own accelerator programs, including Nike and Chile. The question is whether they are simply clones of a good idea or if the high number of startups necessitates more options for generating better businesses. Before accelerator programs came incubators, which were institutionalized environments designed to enable business ideas and startup companies to grow and succeed. The first incubator program began in 1959.
Four decades after the first incubator program, a number of similar companies popped up, including TechSpace, 100x, and HotBank. These organizations were booming along with tech companies, with a business model that exchanged equity in new companies for upscale office space. When the tech bubble burst, the business model had to change to stay afloat and these companies started renting out office space for a set monthly fee instead of exchanging the space for equity.
Paul Graham launched YC in 2005, although this program is different from the incubator model in several key ways.
- Incubators had flexible timelines for startups, while the YC program offers a limited time period where groups of startup owners come in at the same time and graduate the program after several months
- All partners at YC have previous experience in companies that have been highly successful
- Startup owners must exchange pre-seed funding for equity in the business upon acceptance to the program
Downside of Accelerators
Accelerator programs are unique, so one program might have certain downsides that another does not.
If you need help with accelerator equity, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.