Discussion: View Thread

This afternoon, the Executive Director of the Zahn Innovation Center incubator on the campus of San Diego State University asked me the following question: 

Are you aware of any  university run incubator programs that take equity in the teams they incubate?

Can anyone provide us with insights here? 

Was the first sentence really necessary?

> Date: Fri, 18 Dec 2015 11:15:39 -0500
> From: chofer@KENNESAW.EDU
> Subject: Re: [ENTREP] Equity in University-based incubators
> To: ENTREP@AOMLISTS.PACE.EDU
>
> Alex,
>
> The answer that you received of 5% equity for $20,000 is almost
> totally worthless. Basically, this implies a valuation of the
> venture involved of $400,000 - a number that could be far too
> low or far too high depending on the venture involved.
>
> The method that makes the most sense is to provide the funds as
> a convertible loan (so you can write-off the loss if there is one).
> The actual valuation then takes place when the venture secures
> its first real-world equity. If this is done within a year, then
> the valuation is the same as that used in the real-world equity
> deal. If it occurs after a year, the valuation is increased by
> some multiple of the valuation that occurs when the first real-
> world funding is secured.
>
> I have seen at least two approaches used for such longer-term
> valuations. The simplest is to double the ownership percentage
> that the venture gets on its initial real-world funds. The more
> complex varies the multiple depending on how long it takes the
> venture to get such real-world funding. For example, a multiple
> of 1.5 is used if the funds are secured between one-and-two years,
> 2.0 if they are secured between two-and-three years, 2.5 if between
> three-and-four years, and so on. If you want more details, please
> give me a call.
>
> Sincerely,
> Chuck Hofer
> 770-455-4280 Cell 1
> 770-757-3575 Cell 2
>
> Subject: Equity in University-based incubators
>
> This afternoon, the Executive Director of the Zahn Innovation Center
> incubator on the campus of San Diego State University asked me the
> following question: "Are you aware of any university run incubator
> programs that take equity in the teams they incubate?
> Can anyone provide us with insights here?
>
> Alex F. DeNoble, Professor & Executive Director
> SDSU Lavin Entrepreneurship Center
>
> **************************************
> This message is from ENTREP which is sponsored by the Entrepreneurship Division of the Academy of Management.
>
> Please do not post messages with attached files. Commercial messages or spammed messages are not allowed on the list. The use of auto-responder "out-of-office" messages may also lead to your removal from the list.
>
> You can manage your subscription options, including joining or leaving the list here:
> http://aomlists.pace.edu/scripts/wa.exe?SUBED1=entrep&A=1
>
> If you have questions or need help, please contact Jeff Pollack (jeff_pollack@ncsu.edu) or John Bunch (jbunch@benedictine.edu).
>
> Ventures HO!

************************************** This message is from ENTREP which is sponsored by the Entrepreneurship Division of the Academy of Management. Please do not post messages with attached files. Commercial messages or spammed messages are not allowed on the list. The use of auto-responder "out-of-office" messages may also lead to your removal from the list. You can manage your subscription options, including joining or leaving the list here: http://aomlists.pace.edu/scripts/wa.exe?SUBED1=entrep&A=1 If you have questions or need help, please contact Jeff Pollack (jeff_pollack@ncsu.edu) or John Bunch (jbunch@benedictine.edu). Ventures HO!

From: Entrepreneurship Division Listserv [mailto:ENTREP@AOMLISTS.PACE.EDU] On Behalf Of Reger, Rhonda K
Sent: Saturday, December 19, 2015 9:56 AM
To: ENTREP@AOMLISTS.PACE.EDU
Subject: Re: [ENTREP] Equity in University-based incubators

To clarify,

The 5% equity for $20,000 is for teams admitted to MSU's summer accelerator. It is a 10 week long, full-time, immersive program that helps students launch their businesses. It is not an incubator, although MSU has an incubator as well. If anyone else (and some people have already contacted me), want to know MSU's rationale for structuring the program this way instead of via convertible debt, convertible equity or the SAFE documents, I would be happy to put them in touch with the person in charge.

I will editorialize personally, however (and not on behalf of MSU), and say that no attempt is being made to "value" the startup companies. While the equity stake creates an implied valuation, if the university is purchasing common stock with no anti-dilution protection, then the implied valuation is irrelevant. Simply, the fee is 5% equity to participate in the accelerator which also comes with $20,000 in cash. Teams are admitted to the accelerator via a competitive process...this is not an offer made to just any startup. I think the discussion needs to be reframed away from believing that an attempt is being made to value the companies.

About three years ago I wrote blog post on a related topic. It was written before the Y-Combinator SAFE documents came out.

http://illinoispartners.com/convertible-equity-an-idea-whose-time-has-come/ 

Was the first sentence really necessary?

 

 

> Date: Fri, 18 Dec 2015 11:15:39 -0500
> From: chofer@KENNESAW.EDU
> Subject: Re: [ENTREP] Equity in University-based incubators
> To: ENTREP@AOMLISTS.PACE.EDU
>
> Alex,
>
> The answer that you received of 5% equity for $20,000 is almost
> totally worthless. Basically, this implies a valuation of the
> venture involved of $400,000 - a number that could be far too
> low or far too high depending on the venture involved.
>
> The method that makes the most sense is to provide the funds as
> a convertible loan (so you can write-off the loss if there is one).
> The actual valuation then takes place when the venture secures
> its first real-world equity. If this is done within a year, then
> the valuation is the same as that used in the real-world equity
> deal. If it occurs after a year, the valuation is increased by
> some multiple of the valuation that occurs when the first real-
> world funding is secured.
>
> I have seen at least two approaches used for such longer-term
> valuations. The simplest is to double the ownership percentage
> that the venture gets on its initial real-world funds. The more
> complex varies the multiple depending on how long it takes the
> venture to get such real-world funding. For example, a multiple
> of 1.5 is used if the funds are secured between one-and-two years,
> 2.0 if they are secured between two-and-three years, 2.5 if between
> three-and-four years, and so on. If you want more details, please
> give me a call.
>
> Sincerely,
> Chuck Hofer
> 770-455-4280 Cell 1
> 770-757-3575 Cell 2
>
> Subject: Equity in University-based incubators
>
> This afternoon, the Executive Director of the Zahn Innovation Center
> incubator on the campus of San Diego State University asked me the
> following question: "Are you aware of any university run incubator
> programs that take equity in the teams they incubate?
> Can anyone provide us with insights here?
>
> Alex F. DeNoble, Professor & Executive Director
> SDSU Lavin Entrepreneurship Center
>
> **************************************
> This message is from ENTREP which is sponsored by the Entrepreneurship Division of the Academy of Management.
>
> Please do not post messages with attached files. Commercial messages or spammed messages are not allowed on the list. The use of auto-responder "out-of-office" messages may also lead to your removal from the list.
>
> You can manage your subscription options, including joining or leaving the list here:
> http://aomlists.pace.edu/scripts/wa.exe?SUBED1=entrep&A=1
>
> If you have questions or need help, please contact Jeff Pollack (jeff_pollack@ncsu.edu) or John Bunch (jbunch@benedictine.edu).
>
> Ventures HO!

************************************** This message is from ENTREP which is sponsored by the Entrepreneurship Division of the Academy of Management. Please do not post messages with attached files. Commercial messages or spammed messages are not allowed on the list. The use of auto-responder "out-of-office" messages may also lead to your removal from the list. You can manage your subscription options, including joining or leaving the list here: http://aomlists.pace.edu/scripts/wa.exe?SUBED1=entrep&A=1 If you have questions or need help, please contact Jeff Pollack (jeff_pollack@ncsu.edu) or John Bunch (jbunch@benedictine.edu). Ventures HO!

************************************** This message is from ENTREP which is sponsored by the Entrepreneurship Division of the Academy of Management. Please do not post messages with attached files. Commercial messages or spammed messages are not allowed on the list. The use of auto-responder "out-of-office" messages may also lead to your removal from the list. You can manage your subscription options, including joining or leaving the list here: http://aomlists.pace.edu/scripts/wa.exe?SUBED1=entrep&A=1 If you have questions or need help, please contact Jeff Pollack (jeff_pollack@ncsu.edu) or John Bunch (jbunch@benedictine.edu). Ventures HO!

From: Entrepreneurship Division Listserv [mailto:ENTREP@AOMLISTS.PACE.EDU] On Behalf Of Timothy Stearns
Sent: Monday, December 21, 2015 2:35 PM
To: ENTREP@AOMLISTS.PACE.EDU
Subject: [ENTREP] Equity in University-based incubators

All,

Interesting responses. And the different perspectives shared demonstrate the execution of a system garnering equity from students or otherwise is highly complex.

I am curious about how potential liability is handled by universities with an equity stake in a startup. This was the primary issue for Fresno State. Two years ago we created the first LLC in the 23 campus California State University System allowing university funds to be used for investments in startups. The funds can be used for on campus (faculty, staff, students) efforts as well as community as long as the startup is based in the Central Valley. Borrowing from the University of Utah model, we first created awareness of the opportunity by soliciting "grants" to support the prototyping of products. We received nearly 200 applications over an 18 month period. Fourteen were funded with no equity required averaging about $2500 for each award. However, it was stipulated upon completion of the prototype the awardee was required to present to the LLC with first rights to make an equity investment. To date, 3 equity investments have been completed.

We do not incubate the startups. Rather we work with each one through our Innovate Fresno State program housed in the Lyles Center. Basically, it is a coaching and mentoring program similar to an ICorp model.

There is no attempt to do a valuation on the equity side. Rather, it is a modest amount of funding (up to $50,000) with equity in the 5-15% level. It is preferred that the University LLC not be the lead in the investment but rather second to a more significant amount of funding.

The University LLC, while using funds from the endowment, is managed by individuals from the private sector with some university representation on the board. The challenge for any university in taking an equity position is the problem of deep pockets. Should the product from the startup result in damage to the customer, the customer has the option of pursuing the startup which would likely have little money. Or the university, which has considerable money. What makes the university LLC unique is the structure which removes the university as a target of liability.

The issue of liability has not come up in the discussion, but I would like to learn more how the universities taking an equity claim are buffered from the deep pockets potential.

Tim

From: "Neil Kane" <nkane@BROAD.MSU.EDU>
To: ENTREP@AOMLISTS.PACE.EDU
Sent: Monday, December 21, 2015 9:05:54 AM
Subject: Re: [ENTREP] Equity in University-based incubators

To clarify,

The 5% equity for $20,000 is for teams admitted to MSU's summer accelerator. It is a 10 week long, full-time, immersive program that helps students launch their businesses. It is not an incubator, although MSU has an incubator as well. If anyone else (and some people have already contacted me), want to know MSU's rationale for structuring the program this way instead of via convertible debt, convertible equity or the SAFE documents, I would be happy to put them in touch with the person in charge.

I will editorialize personally, however (and not on behalf of MSU), and say that no attempt is being made to "value" the startup companies. While the equity stake creates an implied valuation, if the university is purchasing common stock with no anti-dilution protection, then the implied valuation is irrelevant. Simply, the fee is 5% equity to participate in the accelerator which also comes with $20,000 in cash. Teams are admitted to the accelerator via a competitive process...this is not an offer made to just any startup. I think the discussion needs to be reframed away from believing that an attempt is being made to value the companies.

About three years ago I wrote blog post on a related topic. It was written before the Y-Combinator SAFE documents came out.

http://illinoispartners.com/convertible-equity-an-idea-whose-time-has-come/ 

Was the first sentence really necessary?

 

 

> Date: Fri, 18 Dec 2015 11:15:39 -0500
> From: chofer@KENNESAW.EDU
> Subject: Re: [ENTREP] Equity in University-based incubators
> To: ENTREP@AOMLISTS.PACE.EDU
>
> Alex,
>
> The answer that you received of 5% equity for $20,000 is almost
> totally worthless. Basically, this implies a valuation of the
> venture involved of $400,000 - a number that could be far too
> low or far too high depending on the venture involved.
>
> The method that makes the most sense is to provide the funds as
> a convertible loan (so you can write-off the loss if there is one).
> The actual valuation then takes place when the venture secures
> its first real-world equity. If this is done within a year, then
> the valuation is the same as that used in the real-world equity
> deal. If it occurs after a year, the valuation is increased by
> some multiple of the valuation that occurs when the first real-
> world funding is secured.
>
> I have seen at least two approaches used for such longer-term
> valuations. The simplest is to double the ownership percentage
> that the venture gets on its initial real-world funds. The more
> complex varies the multiple depending on how long it takes the
> venture to get such real-world funding. For example, a multiple
> of 1.5 is used if the funds are secured between one-and-two years,
> 2.0 if they are secured between two-and-three years, 2.5 if between
> three-and-four years, and so on. If you want more details, please
> give me a call.
>
> Sincerely,
> Chuck Hofer
> 770-455-4280 Cell 1
> 770-757-3575 Cell 2
>
> Subject: Equity in University-based incubators
>
> This afternoon, the Executive Director of the Zahn Innovation Center
> incubator on the campus of San Diego State University asked me the
> following question: "Are you aware of any university run incubator
> programs that take equity in the teams they incubate?
> Can anyone provide us with insights here?
>
> Alex F. DeNoble, Professor & Executive Director
> SDSU Lavin Entrepreneurship Center
>
> **************************************
> This message is from ENTREP which is sponsored by the Entrepreneurship Division of the Academy of Management.
>
> Please do not post messages with attached files. Commercial messages or spammed messages are not allowed on the list. The use of auto-responder "out-of-office" messages may also lead to your removal from the list.
>
> You can manage your subscription options, including joining or leaving the list here:
> http://aomlists.pace.edu/scripts/wa.exe?SUBED1=entrep&A=1
>
> If you have questions or need help, please contact Jeff Pollack (jeff_pollack@ncsu.edu) or John Bunch (jbunch@benedictine.edu).
>
> Ventures HO!

************************************** This message is from ENTREP which is sponsored by the Entrepreneurship Division of the Academy of Management. Please do not post messages with attached files. Commercial messages or spammed messages are not allowed on the list. The use of auto-responder "out-of-office" messages may also lead to your removal from the list. You can manage your subscription options, including joining or leaving the list here: http://aomlists.pace.edu/scripts/wa.exe?SUBED1=entrep&A=1 If you have questions or need help, please contact Jeff Pollack (jeff_pollack@ncsu.edu) or John Bunch (jbunch@benedictine.edu). Ventures HO!

************************************** This message is from ENTREP which is sponsored by the Entrepreneurship Division of the Academy of Management. Please do not post messages with attached files. Commercial messages or spammed messages are not allowed on the list. The use of auto-responder "out-of-office" messages may also lead to your removal from the list. You can manage your subscription options, including joining or leaving the list here: http://aomlists.pace.edu/scripts/wa.exe?SUBED1=entrep&A=1 If you have questions or need help, please contact Jeff Pollack (jeff_pollack@ncsu.edu) or John Bunch (jbunch@benedictine.edu). Ventures HO!

************************************** This message is from ENTREP which is sponsored by the Entrepreneurship Division of the Academy of Management. Please do not post messages with attached files. Commercial messages or spammed messages are not allowed on the list. The use of auto-responder "out-of-office" messages may also lead to your removal from the list. You can manage your subscription options, including joining or leaving the list here: http://aomlists.pace.edu/scripts/wa.exe?SUBED1=entrep&A=1 If you have questions or need help, please contact Jeff Pollack (jeff_pollack@ncsu.edu) or John Bunch (jbunch@benedictine.edu). Ventures HO!