Avoiding the Hidden Legal Traps in a Startup Accelerator

For the most part, startup accelerators are godsends for early stage startup companies. They provide physical space, administrative services, technology and internet access, and collaboration with other innovators as well as introductions to potential investors, all of which combine to transform an idea into a product or service in far less time than would be if the startup handled each of these tasks on their own; however, you should know that not all accelerators are created equally. Companies need to perform their own due diligence of the startup accelerator and consider all potential risks.

Most accelerators receive equity/ownership in a company in exchange for the company participating in the accelerator and it must be properly documented. Avoid granting an accelerator control over important decisions that could hamper the progress of your business. It’s also imperative the startup company understand any statements of fact or representations it is making in the related agreements with the accelerator and ensure the terms are accurate before signing the final agreement. Other key terms are anti-dilution rights or preemptive rights which would allow the accelerator to purchase shares in future financings.

There are instances when accelerators request rights that end up being burdensome to the company down the line. It’s crucial that you do not sign the related agreements with the accelerator without actually understanding the terms. Otherwise, it may create major problems in the long run.