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Ask HN: Is $100k for 50% just a terrible idea?

53 points by 147 ↗ HN
My cofounder and I were looking at accelerators, especially the ones around Chicago and came across Lightbank. They have a program called Lightbank Start http://www.lightbankstart.com/ where they give you an 100k seed in exchange for 50% of your company.

We're new, have half of an idea, and no track record. Should we consider applying to them? (We are, of course, applying to the famous accelerators).

59 comments

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scottoreilly
Yes, it's a terrible idea. Giving up control of your company is never something you should do right out of the gates. With someone else owning 50%, it's not your company anymore.
mooreds
What are they offering you?

It seems awful to me, just because you could consult and make good money (not 100k, but 60k between the two of you) and bootstrap and then own 100% of your company.

Note, I ran a solo consultancy for a few years and have been part of a couple of failed startups, so make sure you don't forget the salt.

fsk
That seems like the best plan. Get a regular job for a year or two and save up $100k, and work on the startup on the side.
rpedela
Generally speaking, I don't think it is wise to give so much of your company away especially at an early stage. Most likely the company will need to change direction (pivot) multiple times before becoming successful and that can be hard to do if the founders only own half the company. In my experience, if someone is asking for that much ownership then they want to play a large role in decision making which can be a blessing but more often a curse.

As another commenter suggested, consulting can be a good way to make money to then bootstrap the company. Another option is to enter competitions which isn't guaranteed money, but I know some companies have been initially funded by competition prizes.

RealGeek
Giving up 50% to an accelerator will destory your company. It will make your company un-fundable for any Angel or Series A investment.

Series A investors typically want 30% to 35% of your company. If you have already given 50% to an accelerator, there is no room left for another investor.

You and your co-founder will loose motivation to work for the company. Let's say you give 50% to the investor, create a 20% options pool, and split rest of the 30% with your co-founder. Fast forward 1 year where you have 15% equity, your company is out of cash and unable to obtain next round of funding, and you are sleeping under your desk to run the company. You will have no motivation to continue working for the 15% equity you have, and will eventually give up.

celticninja
of course you could go "the producers" route, sell 50% for 100k then make such a balls up of it that it doesn't go any further than that initial funding. Take your $100k and use it to fund your own startup. ;)
RealGeek
I don't think you can do that. You can not cash out the $100k you just got as investment, it goes into company's account and remains under company's control. With 50% you not only give up equity, but even control. I believe this accelerator may also ask for multiple board seats. The investor here will have the biggest stake and control of the company.
sitkack
I think what parent means is mini vacation while you figure out your next move, but I am sure tongue in cheek. Seems like a waste of money and time all around.

This loan shark territory.

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celticninja
You dont even need a "no extradition treaty" country, just be russian and move back to russia, of course that has the negative points of, you know, having to live in russia.
cwaniak
where $100k isn't too much anyway
mathrawka
It sounds like they want 50% and access to the board, so you are restricted from paying your own salary unless you get their approval.
tptacek
Well, no, it does, right? The company will just dilute to accommodate investors.

Not that I disagree about 50% being crazy; the problem has more to do with founder incentives, though, doesn't it?

clamprecht
Unless they have anti-dilution provisions as well. Sounds crazy? ERANYC has this (unless they've changed their terms). We were accepted, but turned down their $40k because the anti-dilution was a show-stopper for us.
peloton
Can't confirm for ERA but this is standard practice for accelerator programs. 500, etc. do this.
danielweber
Anti-dilution for someone who owns 3% of the company can make sense. Anti-dilution for someone with 50% or more of the company doesn't.

If 5% of the shares are protected from dilution, that still leaves 95% of shares that can flex.

User8712
Could someone explain dilution like I'm 5? I haven't researched it much, but I always assumed additional shares would be split between existing shareholders.

For example, let's say there are 10 shares in a company, and I own 1. We decide we need 100 shares in total. Dilution makes me think 90 new shares are issued, and I still own 1, bringing my ownership down from 10% to 1%. However, common sense tells me if you issue 90 new shares, since I already own 10%, that means 10% of the new shares should belong to me. So, I now have 1 + 9, or 10/100 shares, remaining at 10% ownership.

Why is the above not always the case?

helpful
Your latter argument is incorrect. Let's say there are 200 shares issued. Let's say you are a solo founder and own 100 percent of the company. Investor comes in and wants 20%. You would issue him 50 shares and that would dilute your percentage to 80%. Total shares issued now is 250 shares.

Your shares don't change and you don't just get issued new shares. That's why in startups people reference actual shares of stock rather than percentages. Percentages is just a way for people to communicate. That said, in an actual startup we're talking about tens of thousands to millions of shares initially rather than this dumb down version.

As for why your version isn't always the case, it's obvious that if everyone shares get increase accordingly, and retain their percentage ownership, there'd be no new shares/percentage going to new investors of employees

ig1
Precisely.

We cover this issue in our blog:

http://www.indexventures.com/blog/index/post/860

Typically a post-series A company's cap table will be 20% to Series A investor, 20% option pool, 40% founders and 20% seed/angel.

Having seed investors own substantially more or founders substantially less causes lots of problems further down.

pjungwir
You're got to wonder what they're thinking--after all they're giving away $100k per startup. Do they really expect any of their members to have a successful exit after giving away half the company?
peloton
Their model definitely doesn't fit the industry way of doing things but I give credit to the Lightbank guys for putting something different out there and standing behind it. They have a track record and are investing a lot of their own money. Also, I think they saw how effective their approach with Groupon was and this program may be something where they are trying to replicate what they did there.

That said, this program isn't a fit for me so I don't plan to apply.

rememberlenny
This becomes similar to the "incubators" that existing pre-2005. The companies would fund startups for 80% equity and give a small amount of money, like 100k. Remember, your accelerator should give you much more than just a seed round.
ubi
With any incubator/ accelerator you should perform due diligence. Have they backed/helped build any successful companies? Talk with some of those founders and ask.

Off the cuff, 50% sounds like a bad idea.

corkill
Does it help to look at the extreme examples?

1. You take the money and startup fails, investors lose 100k, you lose time. You prob won't realize your failing for longer because you have 100k and so lose more time.

2. You are wildly successful, Lightbank control your company and 50% of everything the business earns for life. The 100k is probably a minimal factor in your success can you live with that?

PeterisP
It's not even fair in pure monetary terms - even if it's a very rapid complete failure, you'd put in more than $100k worth of your time&sweat; and if it's anything better than that, then your personal investment is much larger than $100k.

The only way it would make sense financially is if you're spending all that $100k in the first year on founder salaries; but at the end of that you've got a company with no cash that's probably not yet selfsustaining.

ohsnap
Yes, high compared to the industry. However if you have no track record and no domain experience you probably won't get into the bigger accelerators. I'd suggest apply and consider their offer. At worst, going through their accelerator could be great experience for you and give you a better chance to get accepted to the famous accelerators down the road.
jagath
Seems like a terrible deal to me. If your idea is any good, I'm sure you'll find 100K via AngelList or so as a convertible note. Giving up 50% to an incubator is unheard of. Incubators are great, but there is only so much they can help you with. Startups are filled with uncertainty and you may need more funding later on. And if you have already given up 50%, you are gonna find it real difficult to raise more capital.
nashequilibrium
The fact that they want 50% off the bat should tell you something already, don't walk run away! I am really surprised that the people running this would actually put the pics & bios on the about page. This is daylight robbery and shameful. If i had to give half my company away for 100k at inception i rather not start it because you are going to need follow on financing. YC only takes like 6 or 7% and is way more prestigious.
sitkack
YC gets you access, the money is for burritos and new macs.
toomuchtodo
Exactly.

Accelerators aren't primarily about money. They're coaches helping you across hurdles from the minor leagues to the majors.

juliangoldsmith
This. $100k won't even get you two decent programmers for a year.
Cookingboy
Two? It won't even get you one depends on geographical locations.
[dead] parasitius
Go ahead and keep your heads up in the clouds like a ten square mile area is "the real America" so the rest if us can wallow in shame at the money we wasted on our educations, you braggarts. In the real America, like say Ohio, that is the salary of almost three developers.
cgore
$90k is an "average" developer in the US (not the Valley, the US: you can easily make that here in St Louis where I am.)

A multiplier of 1.5 - 2.0 is common when you bill out, to account for offices, chairs, electricity, health insurance, etc. And it isn't just software, actually it is often higher in other fields: an auto mechanic might make $25/hour and be billed out at $75/hour.

So $100k will get you ONE run-of-the-mill Java programmer for 6-9 months tops.

This accelerator is just looking for idiots.

http://money.usnews.com/careers/best-jobs/software-developer...

simplyinfinity
This really depends on where you live. if you are in a poor country with a decent amount of good developers, 100k can buy you 4-5 programmers for a year or 2 really good ones for year and a half or two.

But yeah, 50% for 100k is a really bad idea.

bfrog
You won't even get one in chicago for that
dwightc
Terrible.

Just for reference, Kima15 offers $150,000 for 15%.

www.kima15.com

salahxanadu
How much money is your startup making right now?
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koah
As RealGeek stated, it will destroy your company, and it removes the incentives for you to work hard and win.

You are going to be doing the hard work of running your company. An investor who wants to take 50% or more of your company is saying, "I want control."

They may argue that the deal provides opportunity to technical founders. I would argue the deal is unethical and exploits unexperienced entrepreneurs.

Jugurtha
Is it Lightgangstart or Lightbankster? Is it a penetrator or an accelerator ? I don't have my glasses.

Do you need the $100k ? Like do you really need it.

I've heard that Genentech got started with about $250 grand. And that's medical research that led to changing the world.

Unless you're doing something bigger than what these guys did, I doubt you really need the money.

wasd
Funny enough, this is kinda how accelerators/incubators used to be before YC. They took bigger portions and were more involved. PG said this was the anti-model for YC.

Source PG @ Launch Festival: http://www.youtube.com/watch?v=0rVpAKziQJA&feature=share&t=1...

markolschesky
You're going to get raked over the coals if this is your first time and you have absolutely nothing built yet. Ideas are pretty cheap in the grand scheme of things. If you can manage it, you should turn your idea into some kind of a product and try to get it out there. Win some awards, get some press. With nothing, you're in a position where you can't negotiate anything right now, but you can change that.
angersock
So, two important questions:

First, what does Lightbank offer to your business? Do they have network connections that will actually help you? Do they have mentorship which actually fits your problem domain? Do they have customer connections for your first market tests?

Second, what do you need the money for? What do you need to spend it on? That will barely pay for a fulltime engineer and a saleperson, including healthcare and excluding salaries for the founders.

EDIT:

Why not check out Startup Chile: http://startupchile.org/about/the-program/

~$40K in equity-free seed funding, and all you have to do is be part of their community for a few months/a year. It's basically a paid vacation to try and be a startup.

chrisgoman
Lightbank is a fund by the "Groupon guy", Eric Lefkofsky. He was the guy behind Mason (the younger CEO) and was Chairman
gesman
They won't give $100k to untested business idea. Tested business won't gove up 50% for $100k.

It's a lose-lose business model. Whenever transaction happens - someone loses.

IndieDevClub
I think what most developers need is mentors, direction and a community... that's why we'd do almost anything to get into an accelerator. We think "if 50% stake for $100k is the best offer I can get, I should take it because I want to go where things happen."

There should really be an alternative. Something where we could just help each other out. That's why I'm making a club... it's called Indie Developer Club. I just had the idea this weekend so the website isn't operational yet, but anyone can send me an email if they like the idea and want to join.

DenisM
You'll do better if you announce location.

In Seattle, I encourage veryone to join SURF.

IndieDevClub
I'm way too broke for a co-working space. The plan is to initially use Google Hangouts because the cost is $0 and there's no time wasted travelling to a physical location.

If more than 10 people join there will need to be more than one regularly scheduled Google Hangout, so it makes sense to break them up by geography. I just have to make a system that let's people add their own Google hangouts to the system and let other members RSVP for them.

crystaln
Unless you are incredibly desperate, this is a terrible, terrible idea, as is dealing with any VC or organization that demands these terms.

Even if you are successful, you will end up with nothing. The investor will dictate subsequent terms, you will be diluted severely, and you will have poor liquidation terms.

Don't waste years of your life with these losers.

On a side note, Lightbank has screwed around with investing in quite a few companies I've heard of. They are as arrogant and incompetent as the terms they demand imply.