
UK startup accelerators take matched service charges on top of invested capital? - wolfer
Recently myself and co-founders applied to a UK startup accelerator in the hopes of obtaining initial seed funding to kickstart our startup.<p>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.<p>This service charge is apparently there to facilitate the other &quot;free&quot; mentorship, office space and introductions that the accelerator offers.<p>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.<p>Is this commonplace and is anyone aware of other accelerators doing the same thing?
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solve
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
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
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.

~~~
sjaakkkkk
Founder of [http://Accelerat.io](http://Accelerat.io) here. This is exactly
why we started our project, we hear a lot of these stories of second and third
tier accelerators doing these kinds of shenanigans.

Would love to put up the accelerator you're talking about with clear
information so future entrepreneurs applying can know about this upfront.

If you contact me at hello at accelerat.io I'll set it up for you. Rest
assured, it will all be 100% anonymous.

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mrcold
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
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
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.

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buro9
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.

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DanBC
You might want to let HMRC know about this.

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

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cj
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.

~~~
patio11
My understanding is that it is largely an accounting optimization.

Their explanation: [http://www.quora.com/What-is-500-Startups-business-
model](http://www.quora.com/What-is-500-Startups-business-model)

Important to understand: they've got one brand but two entities, the
investment fund and the accelerator. The accelerator is designed to take in $X
per year in revenue and pay out $X in expenses, for a net profit of zero or
slightly negative. (Having more than slightly negative is tax inefficient. You
get to book the implicit tax value of the loss as a carryforward asset but you
would have no way to ultimately realize it since the accelerator is designed
in this model to never actually make significant amounts of money.)

"But isn't it equivalent if you just give them $75k." No, not equivalent. This
manages to teleport revenue through time from the eventual carry into the
present, pays for present cash expenses, and gives that revenue favorable tax
treatment.

How exactly it's favorable tax treatment is a great question for a tax lawyer.
Here's my layman's understanding: you can deduct expenses from capital gains
prior to taxing them but they have to have a certain level of connection with
the gains, and it is possible that "general administrative expenses of our
operation" don't have that level of connection. Shuffling those expenses into
the accelerator makes them clearly deductible against the accelerator's
ordinary income, since the accelerator looks like any money-comes-in-money-
goes-out IT business. The program fee is clearly revenue. Their rent is
clearly an expense. If revenues equal expenses than their revenues are taxed
at, effectively, 0%.

"Tax optimization on $25k doesn't make sense" would be a sensible objection
until you remember that 500 Startups operates at industrial scale and that
this is suddenly $3 million in revenue a year.

n.b. 500 Startups would, eventually, pay whatever the normal capital gains
taxes are on the carry (and/or ordinary income tax if the law is ever changed
to make it less favorable), in accordance with the standard treatment of
investments under US tax law. It's not an avoidance strategy, it is a temporal
optimization strategy.

Edit to add: Above explanation is purely "My best understanding of the matter
as someone who had no hand in putting this together." based on my inexpert
understanding of standard US principles of taxation and their public
statements about it.

~~~
Brushfire
There is an added item at play here: the equity stake and future pro-rate
amounts are based on invested capital, so for $75k you can get 100k (or more)
in pro-rata.

(The more comes from the fact that a lot of times this is convertible note
with a discount, and the discount also provides a bump in pro-rata rights. See
[http://www.bothsidesofthetable.com/2014/10/12/the-
authoritat...](http://www.bothsidesofthetable.com/2014/10/12/the-
authoritative-guide-to-prorata-rights/))

So this isnt just tax optimization, but investment/equity optimization as
well. That said, smart founders should probably value their involvement in the
accelerator as an valuation multiplier: if it isnt, they shouldnt join one.

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thom
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.

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brudgers
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.

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helen842000
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.

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ukd1
YC does not do this.

