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I have seen the various documents the incubators (like Techstars Seed Funding Documents) have posted. These all represent follow on investments after their program.

What kind of terms can you expect from the incubators themselves?

Most indicate they take common shares and dilute along with the founders. However, I recently saw an incubator term sheet with an anti-dilution provision and a stock option pool, even though startups typically would not hire employees at this early of a stage.

Are anti-dilution clauses and stock option pools acceptable terms at this early of a stage in an incubator?

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To me, incubators are like Angels investing in the seed stage of a venture. You really don't want to set a value before your Series A since that's hard to do (you have not really built anything yet) and the evaluations will be artificially low (since you have not built anything yet).

The typical deal I have seen is that these investments are bridge loans that convert at the A-round strike price with say a 20% kicker for taking the risk. I have never seen an anti-dilution clause on an incubator (or seed stage) -- that would imply a around of funding and not a seed stage funding.

Pools are not that common. The typical additional warrant coverage can be thought of as a pool but that gets granted when the A round closes.

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This isn't how YCombinator, TechStars, or any other incubator I've seen works. They take a fixed amount upfront. Generally the money is not even the major part of these programs, it's the time, credibility, access and knowledge the people running the incubator provide. What you are referring to is more of a seed round, which might occur between an incubator and a formal Series A. – Ryan Elkins - IActionable Feb 9 '11 at 14:39
@Ryan. Good point. For me, any round that occurs before Series A is seed and you should be cautious about assigning a value before the Series A. Any option pool for non-employees will be warrants, so I think we are talking the same language, just using different terms. – Jarie Bolander Feb 10 '11 at 13:46
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Here's how our program (of which I was a startup participating - I didn't run the incubator) worked:

They had us set up an option pool (we did 10%) and we gave up 6% in common stock to the incubator. I'm sure they had us set up the option pool up front because they knew we would have to set one up to take money in the future and they wanted to avoid the extra bit of dilution from that.

I would probably avoid an incubator with an anti-dilution clause. The option pool isn't such a big deal - it has a minor affect on dilution but nothing to really fret over unless you set up a massive option pool - and even then the effects would probably not be too consequential. Ultimately you just need to see what they are offering and determine if it is worth it to you or not.

Keep in mind that the Seed Funding Documents you posted are not the documents used to get in to TechStars, they are the documents companies can use for a seed round after TechStars.

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Just curious, if you don't mind saying, which incubator did you participate in? – Zuly Gonzalez♦ Feb 9 '11 at 13:54
It's called BoomStartup (boomstartup.com) - an incubator based in Utah. I went through it last year which was their first. They are currently accepting apps for their second "season". It looks like they just joined the TechStars Network as well. – Ryan Elkins - IActionable Feb 9 '11 at 14:34
Cool, thanks for the info. – Zuly Gonzalez♦ Feb 10 '11 at 5:31

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