If you are in the early stages of running a startup, participating in a startup incubator may help you kickstart your business. A startup incubator is a program that helps startups and entrepreneurs who are in the early phase of a business idea to succeed. In this article, we look at how startup incubators work and what legal documents you will receive as part of the program.
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Startup Incubator vs Startup Accelerator
Startup incubators specialise in providing resources to new startups to help set them up for success. Incubators provide a selected group of promising startups with tools to help them hone their idea and create a marketable product.
On the other hand, startup accelerators are programs for more developed startups. Here, participants engage in the program for a set period of time. They are given access to mentors and other contacts to help build their business and manage potential risks and obstacles.
How Does a Startup Incubator Work?
A startup incubator typically offers various programs, often around three or four months in length. These programs provide:
- comprehensive training;
- education sessions;
- access to mentors and industry connections; and
- speaker and networking events.
The application process for incubator programs is competitive and will vary. Some will have a formal application process, while others will only accept startups introduced by trusted business partners. Successful applicants are usually very early-stage startups.
Incubators offer their participants a range of services to help them build a business. Below, we list key components of the program.
Access to Mentors
Firstly, the success of startup incubators often depends on the depth of the networks and the quality of the mentorship provided. You should apply to an incubator that has experience in your startup’s field. Accordingly, you will have access to mentors experienced in your field who can provide you with specific, targeted advice.
Business Training Programs
The purpose of incubators is to ensure that the business plans of young startups are validated and well-developed. Sometimes, incubators can also be considered a ‘business school’ for startups.
Market Research and Assistance
Startup incubators can also assist you with specific business skills that you may be unfamiliar with, such as market research and marketing assistance. As these incubators have probably helped get many businesses off the ground, they will have a good idea about what works in the market.
Seed Money
Similar to startup accelerators, startup incubators will offer seed money as part of their program, coupled with an equity stake in your startup. Their goal is to provide you with resources that will boost your startup’s chances of success, which they can then capitalise on. Therefore by investing in your startup, they have a genuine interest in your business success.
If your startup incubator does not offer seed funding, or you need additional capital to fund your startup, the incubator can also provide connections to other sources of funding. These sources may include, for example, investors, venture capital funds, or access to bank loans and guarantee programs.
Legal Assistance
Structuring your business optimally is crucial to the foundations of your business. Incubators can help you by providing access to affordable legal assistance, consequently putting you in a position to grow and be an attractive investment to investors.
Legal advice will be particularly helpful when:
- figuring out your business structure and any tax implications;
- ensuring you have a shareholders agreement in place that governs the relationship between the founders and any early investors; and
- registering your business name and logo as a trade mark.
What Documents Will the Startup Incubator Make Me Sign?
Once accepted into the program, the incubator will provide you with a suite of legal documents which include the following:
- Programme Agreement: This will set out the terms of the program and what is included.
- Shareholders Agreement: This governs the relationship between all the shareholders of a company. It should include terms on how decisions are made, how shares can be transferred, how voting works and how disputes should be resolved. If your startup incubator is providing seed funding, they may also provide you with a shareholders agreement.
- Investor Documents: Incubators may invest in your startup through cash for shares, a SAFE, or a convertible note. SAFEs and convertible notes are contractual arrangements where an investor invests money that later converts to equity at a certain trigger event (e.g. a capital raise).
It is important to review these documents, ideally with a lawyer’s help, so that you understand:
- your position in the incubator program; and
- if you are giving any business control away to the accelerator.
Key Takeaways
Startup incubators are a great opportunity for early-stage startups to refine their business idea and build a successful business. They provide resources and access to mentors, which will be invaluable to your growing business. Startup incubators often also provide an early investment in your company. However, before accepting your place, ensure:
- you are comfortable with them having a stake in your business; and
- your lawyer has looked over any legal documents.
If you need assistance with reviewing your startup incubator documents, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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