
Let’s mug a startup founder - pdelgallego
http://thinkvitamin.com/business/lets-mug-a-startup-founder/
======
halesmark
Hi – I’m Mark Hales from Oxygen Accelerator. I just wanted to say we’re
following all the discussions on here and it’s helpful to hear your opinions
and advice based on your experiences. I just wanted to make a couple of points
to clarify a few things. We intend to provide a fuller response once we’ve
spent some time considering all the feedback.

First of all the loan we are talking about is a ‘soft’ loan to the businesses
taking part – with no personal guarantees and will be interest free.

As part of the application process we’ll sit down with each team to understand
their funding needs and will only ask for the loan to be repaid once / if this
level of funding or more has been achieved, or they reach a level of
profitability to support loan repayments, again we will agree this in advance
but the key point here is that we will build in an agreed level of headroom
with the founders.

This will not be a complicated loan agreement, we only want to have the money
back to reinvest in the next round of entrepreneurs when its right for the
business, i.e., there wont be any clever call options. Teams will be given
full sight of this and we will encourage them to get advice before they sign
up to anything.

~~~
swombat
Thanks for jumping in to explain. I appreciate it's not always easy to take
part in a discussion that's mostly focused on ripping you to bits (justifiably
or not). I for one look forward to see how this evolves, rather than judging
everything on the basis of what it looks like on day one. Actions speak louder
than words.

~~~
halesmark
Thanks swombat, I welcome constructive feedback, but have been a bit taken
aback by the nature of some feedback, the best way to engage Entrepreneurs and
investors outside of the tech community is to work with them and provide
constructive feedback, I'll keep listening

------
lionhearted
So that's around $33k USD.

They're only looking to be paid back if you reach profitability.

6% equity to get a $33k loan and some sort of training/advising for 13 weeks
at their facility, and office space afterwards? Could be a good deal,
especially if you have a new business that requires medium amounts of capital
costs to get started. If you're getting something manufactured and your first
run/prototyping/etc is going to run you $15k, it might be good to do that on
their dime. If it works out and you get profitable, you pay them back and
they've got their equity. If it fails, they're out the money.

Could be good, depending on your circumstance and the specific terms on it. I
could see lots of cases where that'd add far more than 6% chance of success
and value to the business.

Edit: Gosh, a lot of reply comments. To clarify:

-You should always, always read the terms carefully in any important contract you're going to sign, and strongly consider hiring a lawyer to give it a once-over.

-In this particular deal, you'd want to make sure the loan isn't personally guaranteed and what the terms of calling it are.

-I could see times where I'd be ecstatic to take this. Lots of brand new companies would have a much higher success chance and EV with 94% equity, $33k cash in the bank, and $33k in debt with flexible repayment terms than 100% equity, $0 cash, and $0 debt.

-Money's worth a lot, and people often underestimate how much it's worth. Especially for an unproven, speculative venture.

-It might or might not be a good deal depending on your specific circumstances, and the exact terms of the loan. Again, read contracts carefully and strongly consider hiring a lawyer to look it over.

-As always, consider not making flippant comments on Hacker News? It's kind of tiresome to get ignorant and flippant replies when you're trying to do a neutral, factual analysis.

~~~
ryancarson
The whole reason I wrote the post is because they're acting as if it's normal
to ask for equity for a loan (and a tiny loan at that). YC, TechStars,
Seedcamp, etc all invest in their companies - not loan them money.

The whole thing smacks of a rich guy who just thinks he can throw around his
money, call it an 'accelerator' and take candy from babies.

I'm doubly angry because here in the UK, we're struggling to get support for
new startups and entrepreneurs. Shady deals like this only make it harder for
people who genuinely want to support startups (like Seedcamp) to gain traction
in the mainstream media.

~~~
random42
Slightly OT: You may want to remove hyper-linking to them in the article. You
do not intent to promote them, right?

~~~
ryancarson
I can't make a valid argument without linking to the service I'm calling in to
question.

~~~
ma2rten
You can use a rel:nofollow link. Then search engines won't take it into
account.

~~~
ryancarson
Good point. Cheers.

------
tlrobinson
As someone in the comments on the article pointed out, oxygenaccelerator.com
is scraping the top link on Hacker News, so they're actually linking to this
article on their homepage. Hilarious.

Screenshot: <http://i.imgur.com/GCYCG.jpg>

------
pauldisneyiv
Almost all incubators aren't worth the time/equity given up.

My startup applied for YC and (having not made it) will not be pursuing any
others. We may apply for YC again, not for the money but the experience and
the alumni.

Experience and Alumni.

------
tptacek
Ryan, I assure you that in the US, a typical startup founder cannot walk into
the bank and leave with an unsecured $163,000 loan. Businesses with many
multiples of that in top-line revenue can't get that loan without personal
liability.

I probably agree that 6% PLUS a $32k (zero-interest) loan is not a good deal.

But I don't even think 6% for ~$20k is a good deal for funding.

I don't think the comparison you're making here is fair. Calling it a
"mugging" is a bit over the top. The people who mug startups are consultants
and do-nothing executive hires.

~~~
ryancarson
The typical lean web startup doesn't need £100,000 as seed funding. I
mentioned our 0% equity loan because it demonstrates what a terrible deal this
accelerator is offering.

~~~
tptacek
Loans and lines of credit often don't require equity. They frequently do
require you to put up your house. You cannot pull an interest-free loan,
backed only by your corporation, off a tree. It is a real offering. It is not
reasonable to call it a "mugging".

We agree on how valuable $32k of seed money (debt or equity) is worth. To wit:
not much.

We agree on how expensive 6% of your company is worth. To wit: a deceptively
large amount.

We agree that this seed program is probably not a good deal.

I just think there's a difference between "probably not worth it" and "bad
virtually to the point of criminality", which is what the wording you used
meant.

~~~
ryancarson
Mark, the guy behind this accelerator, sold his company for multiple millions.
Are you suggesting he doesn't have the business experience to see this for the
bad deal it is?

~~~
tptacek
It is hard for me to argue this with you, because I agree that 6% is a steep
price to pay for any favor, be it an interest-free unsecured loan or a $20k
seed investment.

But that's a subjective point.

What's not subjective is that an interest-free unsecured loan for $32k USD IS
a favor, not a mugging, and while I don't think it's worth 6%, or even 1%,
it's not right for me to accuse the offerer of that loan of mendacity.

A question I'd put back to you:

Assume that there is no seed fund or accelerator program you can get to accept
you, other than this one. Assume that you need the $32k; stipulate that you
cannot, say, bootstrap or consult your way out of the first 6 months living
expenses.

Would you advise someone _not to start a company_ instead of accepting this
deal?

~~~
ryancarson
Your question highlights the fundamental problem. All the hype about
acquisitions of young startups, funded by seed programs, has created some sort
of widely held belief that you _have_ to participate in an accelerator to
launch a startup.

It's also causing investors to be more aggressive in pushing their money on
startups, whether they need it or not. Inexperienced startup founders will
mistake their fervor as an indication that they should take the money, instead
of an indication that maybe their startup has real potential and they should
be slower to give part of it away.

"Would you advise someone not to start a company instead of accepting this
deal?"

That's a false dichotomy. There are plenty of companies (ours, 37signals, etc)
that started without any funding at all. Then when we decided to raise funding
(debt in our case), it was easy to get because we had real revenue and clear
growth. It made sense for the bank to loan money to us because it could see we
that we were going to pay it back.

Let's all stop spreading this bizarre myth that you have to take part in an
accelerator to start a company.

~~~
tptacek
If you ask, you'll find that there are few on HN louder and more obnoxious
about skipping external funding than me. We bootstrapped in 2005. Not getting
funding: best thing that ever happened to us.

But it's one thing to have it in for _all seed funding programs_ (I'm with you
on that!) and another to call one specific one "muggers" because you
particularly don't like their terms. At least, not with terms like these.

Finally, just out of curiosity: is your $162k debt financing secured solely
with your corporation? You didn't have to provide any collateral, or any
personal guarantees? Obviously: I don't think you could pull that off in the
US. Unless your revenues are _way_ higher than I assume they are (my current
assumption is already pretty high).

------
ry0ohki
From their FAQ (<http://oxygenaccelerator.com/accelerator/faqs/>):

When do I have to pay the pre-seed funding back?

Don’t worry, we really don’t want you to hand over the keys to your house or
car – this is a soft loan. Our interest is in your success and therefore will
only look for the loan to be repaid when it makes sense for your business.
This will be done on a case-by-case basis.

~~~
mhd
This sounds a bit suspicious to me, i.e. I couldn't help but reading this in a
fake Brooklyn/Jersey accent wise guy accent.

How are such loans handled in the UK regarding liability? I mean, if you have
a limited company, does one of the founders have to vouch for it with his
personal possessions (as it's often handled here in Germany, for obvious
reasons)?

Yes, if you're doing good, they won't be hasty in getting the money back, but
they just might kick you on your way down, possibly thus ruining your last
shot of getting back up again.

~~~
hessenwolf
Reason number seven million we are not registered in Germany.

Seriously, though, how difficult is it to get a limited liability going in
Germany? Moving there next month.

~~~
mhd
Pretty easy nowadays. The traditional way is the GmbH, which required you to
have a capital of 25k Euros. Now as we're in the EU, you could register your
company everywhere and lots of countries provided you with easier access to
limited liability. As an answer to this, there's a beginner's version, the
"UG", where the lower limit of starting capital is 1 Euro and unless you have
more than three founders, there are form letters that make the legalities very
easy.

~~~
hessenwolf
Good - sounds more competitive.

It cost us 100€ with min of 1€ capital in the Republic + 10€ legal swearing
fee. I filled in the form myself.

------
tlrobinson
I'm having a hard time understanding why they want the money back if they're
taking so much equity. If the company is at all successful the 6% equity will
be worth wayyy more than £20,000. If the company fails they get nothing, not
even the loan repayment.

I suppose it protects them against so-called "lifestyle businesses" that never
have a big exit.

~~~
edanm
Even with companies that have an exit, it might take years, during which the
companies could well afford to pay back the money.

------
fredBuddemeyer
fixed price of investment deals are inevitably doomed by the problem of
average pricing. only startups that find it a good deal will take it and by
rule of nature they are the ones with the least attractive prospects.

(ycombinator can defeat this by continuously manufacturing holy water - just
like the old vcs did. the halo effect makes an investment from yc both more
valuable and variable than the fixed price on offer)

------
kesun421
Sometimes I wonder if the guys who are providing the hosting, logo, font and
design services are the ones making the money, not the startup founders. Web
startups can depend on many paid services to make a web app work, yet not sure
if their own web app can make money at all.

~~~
gerner
If you want to make a good living with little risk, be a dev, a designer or
something like that. Given that most startups fail, and of the ones that
don't, most are only modestly successful, you'll probably be better off (from
a purely economic standpoint) as a paid employee (or service provider) to a
startup than as an entrepreneur starting one up. I think there's something
magical (insane?) about doing your own startup.

Note: I don't have the hard data about this, but this seems to be the
consensus (although those people never presented their data) and my anecdotal
experience. Please, tell me if I'm wrong :)

~~~
truthtechnician
Except the founder gets paid either way, and paid more than anyone else
usually. If the business goes bust nobody takes his house, or his things - he
just finds another job or starts another business with VC welfare.

~~~
gerner
I don't know if that's always true (at least, not for founders I want to work
for). I worked at a startup where the founder totally ruined his personal
credit, and was paid a small portion of what everyone else was making until
well into profitability. I bought a beautiful house in a good neighborhood
while working for him. He _still_ lives in a tiny rented condo.

If things work out, I'll walk away with enough to pay down some of my
mortgage, and he'll be set for a life of luxury. But if things don't work out,
then I still have a great house, and plenty of savings. He'll have no credit,
and no savings.

It seems like a poor use of funding to pay the founder a great salary (i.e.
more than key employees) at an early stage startup: before profitability, or
even early into profitability.

------
mcdowall
I am surprised they managed to get the loan via the Small Firms Enterprise
Loan Guarentee scheme. I don't know any web based business that has succeeded
yet, most bank managers authorise the loan as the guarantor provided you have
enough equity yet in experience lack little web experience and equity in a
property.

I am citing from previous experience, when pitching a travel startup to a
Natwest 'business' manager his response when I expressed a point about Expedia
was.. "who are they?". Enough said.

~~~
ryancarson
We had the same experience with Natwest. Our events business was doing over
£1m in revenue with them, for over three years - and they still turned us
down. They seemed completely aware of a recurring revenue model. Insanely
frustrating.

I just hopped on the web and Googled 'small business loan' and came across
Lloyds. I filled out a random contact form and amazingly they got in touch. I
had to prepare a traditional biz plan and present it. Because we bootstrapped
the startup and revenues showed constant growth, and I was confident in my
pitch, they got back to me next day and said they'd do it. Wasn't easy but it
worked.

~~~
mcdowall
Congrats!

It does irritate me that the UK government bleat on about making business
finance readily available then you end up face to face with the likes of
Natwest!.

Reading articles about the startup program in Chile and the building of a tech
hub in Portugal I do wonder what happened to the innovation in the UK business
sector, if the Startup UK website was anything to go by it's gone.

------
cliftonmckinney
So let's say that the hit rate for follow-on investments for a TechStars
company is somewhere close to 70% (that's fairly accurate). That doesn't
necessarily represent success, but it's a start. Y Combinator is probably
better than that. Now let's say that a "lesser" accelerator's hit rate is
maybe half that. Still a 35% chance of some measure of success. Now maybe
there's a 10% chance by going the pure bootstrap route, maybe less. So taking
the money--and the guidance--in whatever form, makes you maybe three times
more likely to be able to do what you love for a fairly extended period of
time. Not to mention the fact that oftentimes the accelerator provides free or
discounted services for being a cohort company. Good legal for a deep
discount, legal office hours, design consults, dinners with VCs, etc.

I can't speak for what Oxygen is doing, or whether they're providing these
services or not. But many accelerators that aren't called Y Combinator or
TechStars are, and though there won't be as many successes to come out of
those, there no doubt will be some. There may even be one or two who attend,
learn a bit, fail, and then come back to apply at one of the big dogs later
down the road.

------
meow
The loan clause is tucked away under FAQs instead of next to the 20k amount on
homepage. How convenient... pickup that bat timmy.. hit him square on his
head... :)

------
rudeboypeter
Also, don't forget that if the company goes into liquidation, debt gets
preference to equity holders when it comes to distributing assets. So for all
the "trust me" rhetoric, it remains theoretically possible that the creditor
(ie the "incubator") could call in the loan, and if the cash is not at hand,
they could force the company into liquidation. They would then end up with
title to any IP, contracts or any other company assets.

------
braindead_in
In the Indian startup I hear of a new incubator/accelerator every few month.
Of course, they don't give any money and yes they want equity. Its the hottest
scam it seems these days.

------
keeptrying
This is an european phenomenon. I remember reading about one seed fund in
europe that took like 50% equity of your equity.

------
omouse
I don't get it, isn't the 6% basically the interest rate?

~~~
ryancarson
No, because if any of these startups make it big, it'll be 6% of a much larger
amount (think $10,000,000+). $600,000 is a little more than the interest you'd
pay on a $33,000 loan at 6% :)

------
halesmark
It looks like we have raised some controversy and questions around the funding
model we have chosen for Oxygen Accelerator. So this blog post is in response
to some of the questions/points raised:

Q. We could just go get a bank loan and not have to give up any equity?

A. It is true there are alternative sources of funding including bank loans
through the government supported Small Firms Loan Guarantee scheme; this loan
is only available to companies that can prove the ability to repay it, however
these loans charge a facility fee, are interest bearing, have fixed payment
terms, and the founders are required to give personal guarantees. The 70%
guarantee made to banks by the government only kicks in once the personal
guarantees from the founders have been exhausted. Our loan is interest free,
has no fixed term, is secured only against the business, does not have any
personal guarantees and is only repayable if and when the business can afford
it without jeopardy to the business. If the business fails (which inevitably
some will) the loan is written off. It is made at a time when in most cases
the founders have an idea; they may not have incorporated, may not have a
business plan or even a well thought out strategy.

Lots of people have understood what we are offering – here is a comment on HN
from ‘lionhearted’ which sums it up well.

“I could see circumstances that I’d take this deal in a heartbeat – starting a
brand new company with 94% equity, $33k cash in the bank, and a $33k loan with
very flexible repayment terms seems like it’d have a much higher chance of
success than starting with 100% equity, $0 cash, and $0 debt.”

Q. Isn’t 6% equity for a 20K loan a ridiculous interest rate?

A. The 6% of equity is not directly related to the £20k. The 6% equity is in
return for the full programme, including aftercare. We are enabling companies
to reach an entirely new level, through the provision of facilities, mentor
guidance, accommodation, investors, an evergreen loan and office space for
6-months – plus we will keep a vested interest, providing an open-door policy
to the team in Birmingham. An important point is that it’s a loan of UP to
£20k – purely to enable the teams to get onto and through the programme. It is
not seen as an investment to last them post-bootcamp, but allows them to reach
‘investor day’. They don’t have to take this loan if they don’t require it.

Q. Why wouldn’t I just bootstrap rather than taking a loan?

A. Bootstrapping is a great way for a startup to get off the ground, but often
requires the founders to take on debt via credit cards or loans from friends
and family which also have to be paid back. The difference here is we are
offering a programme (facilities, mentor guidance, accommodation, investors
and office space for 6-months) that includes an interest free loan to your
business with no personal guarantees. Here is a HN comment from tptacek

“Loans and lines of credit often don’t require equity. They frequently do
require you to put up your house. You cannot pull an interest-free loan,
backed only by your corporation, off a tree. It is a real offering. It is not
reasonable to call it a “mugging”.”

Q. I’m having a hard time understanding why they want the money back if
they’re taking so much equity.

A. Typically it takes 3 years + to get a return on an equity deal so if you
are running an accelerator at least once a year you need to be able to fund it
for at least 3 years before getting (3 * £200k = £600k + running costs =
£1million) any return. By using an evergreen loan model we stand a chance of
returning some (not all) money to the programme quicker than 3 years and
allowing us to sustain the programme and support more entrepreneurs which has
to be a good thing for the entire community.

Q. If we make it big it’ll be 6% of a much larger amount (think $10,000,000+).
$600,000 is a little more than the interest you’d pay on a $33,000 loan at 6%?

A. The type of high-growth tech businesses we are looking to support on the
programme will need additional rounds of funding and therefore our 6% equity
will be significantly diluted. It would be great to think that all businesses
will exit for $10million + but the reality is very few will so the return is
unlikely to be anything like that.

Q. Not all accelerators are equal

A. I agree and not all startups are equal and what works for one doesn’t
always work for another. I don’t seek to compete with Tech Stars, Seedcamp, Y
combinator or any other scheme. I applaud their efforts in what they do for
aspiring entrepreneurs; any reference I make to them is around the fact that
we are offering a 13-week bootcamp that is mentor intensive in order to assist
companies in raising their next round of funding.

Q. This is a rip off for startup founders who don’t know any better.

A. I think this does the tech community a dis-service. The vast majority have
a very good understanding of these matters and are more than capable of
weighing up what is the best programme for their startup. The fact that this
is not an identical offering to other accelerators does not make it a rip off,
it makes it different.

Q. The loan information is buried in the FAQ’s

A. The FAQ’s are hardly buried they are very clearly displayed on the
Accelerator page. All the accelerator sites use the FAQ’s to provide the
detail around their programmes. However, to ensure its very clear we have
added the words “soft loan” next to the £20k on the home page.

Q Why don’t we just get Angel or VC investment?

A. There are a lucky few startups that turn up and pitch an idea to an Angel
or VC and get funding but there are more that are not that lucky and have to
actually prove traction, have a credible business plan or be revenue
generating. What accelerator programmes like ours do is help your startup get
to that stage quickly (13-weeks), which means you are much more likely to then
find the investment you need to grow the business to the next stage. Of course
this is not the only way to become investment-ready; there are plenty of
others and only you can make the best choice for your business.

Q. There are lots of accelerators why do we need one that offers loans

A. My experience is that there aren’t enough accelerators to support startups
and many talented individuals with great ideas fail to get the support
(financial and non-financial) to get their ideas off the ground. My programme
is aimed to support those people that see the value of the programme; if they
need neither the money or the support because they have all the skills and
connections to go it alone then clearly they wouldn’t benefit from the
programme. The fact that hundreds of people applying to Tech stars, Y
Combinator and other accelerators aren’t successful suggests there is a need
for more support to be provided (YC probably got 1000+ applications and
selected 60 teams, so that’s 940 teams who will not receive support this year
alone).

The rationale for it being an evergreen loan is so that the ones that do repay
the loan, at a time when arguably they no longer need it, is to allow other
entrepreneurs the same opportunity for the long term. Other schemes such as
Difference Engine were funded by regional grant type funding which, as
government cash ran out, were closed and therefore no longer open to budding
entrepreneurs, despite the fact that many of the companies that benefited from
the programme have gone on to successfully raise further rounds of funding
with the assistance of the programme and arguably don’t need the original
funding anymore. Our aim is to make the programme sustainable and not at the
whim of investor sentiment. The evergreen loan model in theory returns money
back to the programme quicker than an equity-only model and hence allows us to
support more entrepreneurs.

Mark Hales <http://oxygenaccelerator.com/blog/2011/05/oh-no-its-a-loan/>

------
suking
Is it truly a loan or convertible debt?

~~~
3pt14159
Hard to image it being convertible debt if the amount he is asking for is a
fixed 6%. "Yes Mr. founder sir, we'd like convertible debt with a cap of
£333,333 and just to be nice guys we'll introduce a floor for you of
£333,333."

------
repoleved
This is an interesting post from an unlikely source. I think carsonified Wil
soon be the Arrington of bullshit startup advice. Just trying to peddle those
CSS3 How To Videos...what a joke.

~~~
ryancarson
I guess the fact I've started four companies doesn't count :)

\- One acquired \- One failed \- One currently humming along profitably \- One
currently growing at an insane pace (thankfully!)

~~~
swombat
Don't feed the trolls! :-)

