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The tug of war between how much startup equity to give up in exchange for cash, advice and exposure from business incubators appears to have hit home for some Minnesota entrepreneurs.
In mid-June, CEO of emerging health IT startup Qualtrx, circulated an e-mail with the subject line “I’m so humbled…Qualtrx made it!” that announced the startup’s selection to Project Skyway, which bills itself as a Minnesota’s first tech accelerator.Qualtrx, an innovative healthcare social network that aims to move sales between vendors and hospital systems completely online, was selected as one of eight startups that would be part of Project Skyway’s three-month business acceleration program. The program provides $6,000 per founder to chosen startups.
But barely two months later, Qualtrx and a second startup, Paypongo, pulled out. Qualtrx’s CEO Rashaun Sourles declined comment, but Paypongo told the Star Tribune that the company had not looked deeply into how much startup equity Project Skyway was demanding. Initially, it was asking for between 6 percent to 9 percent. Later, the accelerator clarified that it was asking for 9 percent. The shares would be held by Augusoft, a tech firm run by Project Skyway founder Cem Erdem.Startups would have the option of buying back half of the equity once they raised $1.5 million.
A call to Project Skyway wasn’t immediately returned.
Can business incubators be more Shark Tank than startup launching pad? Not all ask for equity. NYU-Poly, for example, has three incubators where providing equity is optional.
However, most business incubators do require startup equity in exchange for funding, mentorship and access to investors.
Healthbox, which describes itself as the first accelerator in the healthcare industry, plans to provide $50,000 in seed capital in exchange for a “small amount of equity” when its inaugural class launches in January.
YCombinator, perhaps the most well known incubator providing startup funding for early stage tech companies, offers up to $20,000 in exchange for 2 percent to 10 percent in equity. TechStars is known to provide $6,000 in startup funding per founder for a maximum amount of $18,000 in exchange for a 6 percent equity stake.
On cash alone, Project Skyway’s offer of $6,000 for 9 percent of the company would put the value of the company at roughly less than $70,000. But, then again, most of these early-stage startups have few options. Plus, it’s hard to overestimate the value of the advisers, expertise and access a business incubator can deliver.
Exhibit A: All recent YCombinator startups got a blanket offer of $150,000 in convertible debt from a new Silicon Valley angel fund.
UPDATE: A marketing director for Augusoft, who represents Project Skyway, said that he and others were surprised that the Paypongo, but especially Qualtrx, pulled out.
“Qualtrx was touting the fact that they were one of the startups selected, so we were surprised and disappointed that they pulled out,” said Chris Murphy.
Murphy added that it was made “pretty clear” right after a bootcamp weekend in early June where semifinalists were chosen that Project Skyway was asking for 9 percent in founder’s shares. That information is also on the FAQ portion of the website.
The plan now is to post the contract, that future startups selected will sign, on the website, he sais.