A startup accelerator is a program designed to ‘accelerate’ the growth of startups to maximise their potential. Therefore this program may be appropriate for you if your startup has already developed its product and is looking to scale quickly.

In this article, we explain how a startup accelerator works, and what legal documents you will receive when joining the program.

What’s the Difference Between a Startup Accelerator and Startup Incubator?

Startup incubators and startup accelerators focus on different parts of the startup journey.

A startup incubator ‘incubates’ startups at the idea phase. It helps them build out their product and create a viable business model and offering.

On the other hand, a startup accelerator focuses on the growth stage of more developed startups. Accelerator programs usually run for a set period of time, such as three to six months. They offer startups access to business mentors, immersive education and the opportunity to grow their network.

How Does an Accelerator Program Work?

The Application Process

Accelerator programs begin with a stringent application process to select a cohort of startups to go through the program together. Accelerators look for startups that:

  • have well-developed business ideas;
  • offer products they believe will be successful; and
  • will benefit from the accelerator program.

Often, the accelerator will also offer seed money in exchange for a stake in the startups they accept. Accordingly, it is in the accelerator’s best interest to accept startups in which they see the most potential.

Access to Mentors

As part of the program, accelerators will often put successful applicants in touch with mentors experienced in their particular field. These mentors can provide insight and advice directly relevant to your business. You can also use this as an opportunity to further develop your prototype and business plan.

Business Development

A key part of any accelerator programme involves discussing and developing your growth and fundraising strategy. The program can help you work on:

  • pitching your vision;
  • preparing for meetings with investors and potential networks; and
  • detailing the overall investment strategy of your startup.

Usually you will also undergo business training to help you:

  • expand on your business plan;
  • understand sales principles; and
  • improve your general business management skills.

At the end of the program, you will get the chance to pitch your startup to a room of other members, the accelerator, and potential investors. This is a valuable opportunity for you to reach new networks, and demonstrate how far your startup has progressed during the program.

Legal Documents Provided By an Accelerator

Once your application has been accepted, the accelerator will present you with a suite of documents. It is important to review these documents so that you understand:

  • if you are giving any business control away to the accelerator; and
  • what your relationship with the accelerator will be beyond the life of the program.

While it may be difficult to negotiate minor details in the agreements due to the number of startups in your cohort, do not hesitate to negotiate any terms that are especially important to you. A startup lawyer can help you look over these documents and negotiate on your behalf.

The legal documents provided may vary between accelerators, but we set out the key documents below.

1. Programme Letter

Firstly, the programme letter is your official offer letter to participate in the program. It describes what is included in the program, and may outline any conditions associated with it.

2. Shareholders Agreement

A shareholders agreement is a document that governs the relationship between shareholders. The accelerator may provide you with this document if they are investing in your company, or simply as a template resource.

Key terms in a shareholders agreement include:

Your company may already have a shareholders agreement so you may wish to retain yours. If you do not have one yet, you can get a tailored agreement drafted for you by a lawyer that sets out a fair balance between founders and investors. However, if an accelerator is investing in your startup, it is likely that the shareholders agreement they provide will be investor-friendly.

3. Investment Documents

One reason why accelerator programs are so competitive is because they often offer seed funding to help grow your business. There are three common avenues an accelerator may choose to invest in your company.  

Equity Finance

Traditionally, an accelerator provides seed funding by purchasing shares in your company. To do so, they provide a share subscription agreement or offer letter that sets out the mechanics of the investment. This document specifies:

  • how many shares the startup is issuing;
  • if the shares are subject to any conditions (such as vesting);
  • the subscription price for those shares; and
  • when the startup will issue the shares.

Simple Agreement for Future Equity (SAFE)

A SAFE is a contractual agreement where an investor agrees to provide funds to a startup in return for the right to convert their investment into shares in the company.

The conversion will occur at specifically defined trigger events. These are usually an exit event or the startup’s next equity financing round.

Due to their simplicity, SAFEs are becoming increasingly popular in Australia and many startup accelerators have adopted them as an investment vehicle.

Convertible Note

A convertible note is similar to a SAFE but with an added debt component. Under a convertible note, an investor makes a loan to the startup. The loan automatically converts into equity at a trigger event (e.g. the closing of a future equity round). So investors are rewarded for making an early investment with a discounted price per share (compared to the equity round investors).

Conclusion

Getting accepted into an accelerator program is an exciting time for any startup. It will help you build your business and set the foundations for rapid growth. The accelerator will also be closely involved in the development of your business. Therefore be prepared to work closely with them and any connections they provide. Make sure you also review any legal documents provided to you by the accelerator, so you understand the relationship between the accelerator and your business.

If you have any questions on startup accelerators, or need help reviewing accelerator legal documents, contact LegalVision’s startup lawyers on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

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