Made by Shailendra Singh 1

How to evaluate an offer from a Startup Incubator

Made by Shailendra Singh 2

1. Calculate valuation & Determine value

2. Scrutinize the Investment Structure

3. Research the Mentors

4. Inspect the Office Space & Incubator’s End Class Date

5. Search for the Incubator’s PR & Marketing Efforts

6. Determine the Opportunity Costs

7. Conclusion

Made by Shailendra Singh 3

Calculate Valuation & Determine Value• Incubators offer very little pre-money valuation• Measure equity percentage (not monetary value) to all

intangibles and tangibles• Equity % of an incubator in an startup = equity % on seed

capital – equity % of intangible • Intangibles are mentorship (equated to advisory board) +

convertible debt with no cap/conversion discount• An incubator’s offer of $25,000 at 6 % equity should be

revised to include equity % of intangibles to calculate pre-money valuation

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Scrutinize the Investment Structure• Incubators may structure their investment in a

startup to get high return across the portfolio

• This may include taking preferred stock, protection against dilution or setting an option pool

• Incubator’s can play the option pool shuffle card that can dilute the pre-money valuation for the startup

• The question most important is whether the incubator’s T&C can hinder future financing from VC firms

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Research the Mentor

• Incubators put their onus on providing mentorship, so research them to assign the right intangible value in terms of % equity!

• Relevant questions to ask: – do they fit into our team and product?– Do they know our space?– Would we get to choose our mentor group? – How often would they be available for advice or drop ?

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Inspect the Office Space & End Class Date

• Being sure if the startup can be productive in the office space provided

• Is the office space private or shared!

• How is the conference room and how hard is to schedule calls!

• When does the benefits of mentorship and office space end (mostly post demo-day)

• What kind of support are the incubator’s willing to provide post-demo/engagement

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Search for Incubator’s PR & Marketing Efforts

• What does the incubator does to market itself and its incubated startups

• Startups should check for media coverage/photos of demo-days of incubators!

• Startups should check with previously incubated class of startups that can give feedback

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Determine the Opportunity Costs

• The trade-off is sometimes in choosing b/w an angel investor or an incubator

• The advantage with incubators is that they run with measurable goals with a set timeline

• The option to go with an incubator will be with lesser money but better quantifiable intangibles that they can put together best

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Conclusion• Incubators’ T&C should never hinder current

valuations or future financings

• Incubators’ intangible contribution should be more useful than option to choose to work with cash

• Incubator should be the best springboards to future mentors but also have a great office to work!

• Startups should choose an incubator assuming that they will amply fit an as its PR/marketing partners

Made by Shailendra Singh 10

Shailendra Singhshailendras@langoor.net