UK startup accelerators take matched service charges on top of invested capital?

35 points by wolfer 11 years ago | 23 comments

Recently myself and co-founders applied to a UK startup accelerator in the hopes of obtaining initial seed funding to kickstart our startup.

In the process of negotiating terms, it was slipped into conversation that the accelerator actually invests double the amount requested into the business (artificially inflating the business valuation and potentially creating some pretty big burnrate questions for future investors), which is paid directly to the accelerator on receipt of funds as a service charge.

This service charge is apparently there to facilitate the other "free" mentorship, office space and introductions that the accelerator offers.

It seems like this is a bit of a tax fiddle from an SEIS (Seed Enterprise Investment Fund) perspective, as all they are doing is draining the fund to essentially pay themselves, exposing very little risk, but obtaining a decent equity share in a new start up business. This also eats into the £150k of available SEIS funding, as a chunk of it is not invested at all, just leaving through the backdoor to pay the accelerator.

Is this commonplace and is anyone aware of other accelerators doing the same thing?

solve 11 years ago |

Commonplace, but what's the amount? Often they ask you to set aside 5% to 25% for them.

The one we went through got most of their fees via "highly recommended" legal and accounting service kickbacks, which charged far higher than market rate monthly retainers, for doing absolutely nothing in some cases. Lawyers and accountants who stood to benefit were literally partners at the fund... We decided to stick with our own accountant, and the accelerator got extremely upset at us for doing so. Some shockingly unprofessional, threatening, vague emails and lots of criticism for not choosing their accountants.

You are correct that the people running these funds will get paid no matter what, and will have absolutely no financial incentive to make you succeed. Quite the opposite. Ours in particular has done a lot to minimize their work, drag out anything they're required to do over months, and get rid of companies as quick as possible after their investment.

These can still work out, just know that these aren't the tier #1 funds that we're used to hearing about. Founder beware.

wolfer 11 years ago | |

This particular one was £50k investment for 9% equity, plus they send an additional £50k to the company, which is transferred immediately as a "service charge".

Writes off £50k of your SEIS allowance as a business, which as I'm sure you know is like gold dust for the first £150k, as 50% of the investment can be written off against investors income tax, then a further 30% if the company fails.

If the company succeeds, the investors pay no capital gains on sale of shares.

wolfer 11 years ago | | |

To further add to this, it's not necessarily the fact that they take a service charge that I take issue with. It's the complete lack of transparency up-front and only once you're close to getting on the program that it's ever disclosed.

mrcold 11 years ago |

Congratulations. Today you figured out that startup accelerators, incubators, hubs, conferences and hackathons are just businesses trying to make money out of your enthusiasm and efforts. They don't do it out of the goodness of their hearts. They do it to turn a profit.

To answer your question, some of them take equity and others take cash. Either way, you're getting screwed. Unless, of course, you just keep finding investors to pour money into it. If that's your objective, the price is usually worth it.

cj 11 years ago | |

I started 2 companies through YC and Techstars and strongly disagree with this. Both were incredibly valuable and well worth the equity for us.

Edit: I didn't mean to say that all accelerators are worth it, but I disagree with the sweeping generalization that all accelerators are screwing their companies.

ilghiro 11 years ago | | |

Looks like you're based in the US. In the UK making sure you don't fritter away SEIS money is enormously important. Effectively you have an £150k allocation up to which investors can claim 50% relief in the form of income tax deductions (plus many other great things).

Whatever reason the accelerator is doing it for (whether good or bad for them) is bad for the company if it's losing some of it's allocation without seeing the money. A lot of early stage investors won't touch a non-SEIS deal.

Edit: Also for every YC/Techstars/500 there's a 100 "incubators" that overcharge and underdeliver.

solve 11 years ago | | |

Don't do that. It's spreading the myth that these lower-tier accelerators are trying to do things the same way as the top-tier accelerators.

That is extremely not the case, too often. Many times it's the equivalent of used car salesman / real estate broker type sales people - who are good at selling themselves to people with money and love to squeeze the most out of negotiations just for fun, with no clue or regard for the tech startups. Wish I was exaggerating.

pskittle 11 years ago | | |

could you talk about your experiences with each and how different or similar they are?

buro9 11 years ago |

I think this is really bad.

Specifically because of the way that it burns the SEIS allowance.

I would be tempted to call HMRC and explain what the accelerator are doing, that they are using the investment incentive as a service charge for themselves, and to ask them to clarify whether or not this is allowed and the degree to which it creates an issue for your company.

DanBC 11 years ago |

You might want to let HMRC know about this.

https://www.gov.uk/report-an-unregistered-trader-or-business

That page is aimed much more at the "cash in hand" trader, but they'll take reports on anything.

You don't have to know that it's tax evasion to make a report.

cj 11 years ago |

500 Startups does this too. From their website:

"We invest $100k in exchange for 7%, and charge a $25K program fee for a net $75K investment."

Not quite sure why some accelerators do this.

thom 11 years ago |

This is commonplace. You may also find that you have to register for VAT and claim that back on the service charge to get the full amount you're expecting. It's pretty much a standard part of the Jon Bradford mentor-led accelerator startup kit, which has spread pretty far at this point.

Only you know if it's a deal you can stomach.

brudgers 11 years ago |

The only reason someone would take away potential runway from a startup that they are investing in is that they are running a lifestyle business rather than managing a portfolio of startups. One hit pays for all the overhead and then some. The experienced experts in startups play long not short.

helen842000 11 years ago |

Yes, I took part in a UK incubator programme. It was only seed stage investment but even still, a portion of the funding was taken by the operators for office space, mentors etc.

ukd1 11 years ago |

YC does not do this.