NJ Accelerator TechLaunch has predatory terms
Update: I believe NJ Accelerator has changed the terms on their contracts. This post still exists as a reminder to startups who are looking to raise money what issues they should avoid.
Startups please keep in mind the drawbacks of TechLaunch’s and other dumb investors’ disproportionate equity and board representation agreements are not immediately apparent so please do your research.
New Jersey accelerator Tech Launch takes the predatory methods of venture financing from 2000′s. These days the access to valid information such as Venture Hacks, Peter Thiel Class Notes, and Feld/Mendelson Term Sheet Series reduce the information asymmetry in venture rounds between entrepreneurs and financiers.
Tech Launch is the incompetent group of investors that was blessed begrudgingly by the state to install an incubator for NJ startups. Various rumors have emerged on the foundation but the state has swept them under the rug. Startups please keep in mind the drawbacks of TechLaunch’s or other dumb investors disproportionate equity and board representation are not immediately so please do your research. Additionally, it’s a good idea to reach out to alumni and ask for their experience.
As an exercise on horrible financing practices, I’m going to break down the clauses that make up the laughable term sheet for Tech Launch:
Tech Launch Agreement
The purpose of this section is to highlight the Investment Terms (The Terms) in which Tech Launch Fund (TLF) and its agent TechLaunch LLC is considering an investment in The Company. As a Semi-Finalist, The Company is asked to review and in principal agree to The Terms highlighted below in order to proceed. The Stock Purchase Agreement (SPA), issued prior to the actual investment and The Company’s acceptance into the LaunchPad # program (The Program), will more fully describe the terms and conditions and additional agreements reasonably necessary to protect The Company and The TLF investors.
To protect my sources, I removed the name of the company and the specific fund & TechLaunch class of the company.
Purchase and Sale of Stock: The Purchaser will invest up to $25,000 in two tranches: the first tranche ($12,500) upon signing of The Agreement and the second tranche ($12,500) approximately forty-five (45) days after The Company has participated in the Program. The Company will issue sufficient shares to provide and maintain a 10% equity stake on a non-dilutive basis in The Company. The Company will continue to issue additional shares in order to maintain The TLF’s 10% equity stake in The Company until the “next round of financing” which must exceed a $250,000 of capital (equity) cash contribution within a three month time period.
Selling non-dilutive capital to any investor is a disaster: Full Rachet Non-Dilution stacked with Limited Exercise Period
Purchaser Representations: The TLF will provide the necessary representations and warrants to The Company as will be more fully described in The Stock Purchase Agreement.
Let’s take a look …
Preferred Purchaser Rights: During the “next round of financing” the Company will grant The Purchaser and individual investors in The TLF (Purchaser) the right to purchase (on a pro-rata basis) up to a total of Twenty percent (20%) of equity (Common or Preferred) of the total round of financing to be offered by The Company at a ten percent (10%) discount. This right will be at the same terms and conditions of the “next round of financing,” except at a ten percent (10%) discount.
I understand the ability to invest in future rounds at a discount for taking an initial risk but the requirement to purchase upto 20% when 10% is non-dilutive seems excessive.
CONFIDENTIAL INFORMATION
Contact: Mario Casabona, CEO — mario@techlaunch.com, 877–776–5850.
©TechLaunch, LLC, 2013.
Please contact and berate their anti-entrepreneurial practices.
