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I have recently submitted an application to receive a government grant for funding. There is a requirement, that is to be submit via an incubator.

I contacted an incubator and they are ok with helping us get the funding. However, they asked if we are happy to give away 3% equity for the administrative work.

Does incubator always do this? It seems that they are "sucking" on aspiring entrepreneurs.

I am wondering if it is a good deal. 3% equity for administrative work? Doesn't seems beneficial to us.

Advice needed.

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3  
What do you get for that 3%? – TimJ♦ Aug 6 '12 at 14:20

5 Answers

up vote 4 down vote accepted

On a related note: why should apple make 30% on every app sale? Because they can - Apple sets the rules there. You have a choice - don't submit an app to the apple store, or pay the tax.

Do you want to participate in a government grant? Get free money without dilution? To participate, you need to be in an incubator. The Government grant sets the rules here.

Somewhere in the rules likely there is a "type of incubator" restriction - otherwise, joining something like nreduce.com could theoretically be a loophole here. You also should check if there is other restrictions around what constitutes "being in an incubator" - I would think the grant wants to promote growth in companies that have been vetted by incubator contest (example: lots of people apply to techstars, few are accepted) vs someone just wanting free cash to chase an idea.

That said, if this incubator will back you cost free and act as the front for this contest, 3% may not be that bad. But the offer likely isn't conditional on winning - you will give 3% of your company away for the opportunity to submit your grant application.

I would never do that, but others may consider it a deal.

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up vote 5 down vote

You haven't done anything to reason about the current fair market value of your startup, and you haven't given us any info on it.

If your startup essentially is just a loose dream at this point, then 3% sounds high, but possibly not unreasonable depending on the specific amounts & work involved.

Start by guesstimating the fair market value of what you have now.

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up vote 1 down vote

You need to find a reference point. So (i) talk to a couple more incubators, and (ii) ask for details of companies that have recently accessed this specific grant and reach out to them.

You'll very likely discover that the word 'incubator' means very different things in different cases. And that will help you decide which incubator best suits your position - in terms of the value they're adding, and the reward they're asking.

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I assume this is another way for the government to manage the risk. You fund 10 companies, one succeeds, those 3% fund the failed 9.... ;-)

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well, the government does not take the 3% equity, the incubator did. – Slay Aug 7 '12 at 7:53
so why is the government referring you to the incubator? – ron M. Aug 7 '12 at 15:36
I think this is some kind of risk management for the government. They make use of incubator to filter out potential startups. If not, there will be alot of applications for government to review. So why not give the hard task to incubators? – Slay Aug 8 '12 at 15:59
up vote 0 down vote

Have you ever seen a government application for anything lol

I was going to fill out a GSA app for a company I worked for, it was easier to pay 6k to a consultant to do it. No joke the app itself is a few hundred pages, plus you need supporting materials. I don't think it's unreasonable for an incubator to ask for X percentage, don't forget they are also providing you with support to run your business. Additionally, don't forget the government is giving you a grant, aka money that doesn't need to be paid back. One question though, how are you getting a grant for a commercial solution?

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