Accelerator

What is an accelerator?

Accelerator (in German Beschleunigungsprogramm) refers to a time-limited support programme that helps young companies in a group (cohort) over a few months with capital, mentors and contacts to investors. Such programmes are also called startup accelerators or accelerator programmes. Many programmes receive a minority stake for their services, that is, a small share in the company. The programme often ends with a presentation day in front of investors (demo day).

Accelerator programmes start at an early stage, usually when a first, simple product version (MVP, minimum viable product) exists and the first customers are being won. The operators are private programme companies, often linked to an early-stage fund, corporations with their own programmes (corporate accelerators) and publicly funded institutions. Participation is governed by a programme agreement, and the equity stake itself is implemented through a capital increase or a convertible loan. For later financing rounds, what matters most are the rights that the programme acquires in the process.

Structure and course of an accelerator programme

The programme selects its participants in an application process, assessing team, market and product. The selected companies go through the programme together, in practice often for three to six months. The programme phase comprises working sessions on sales, product development and financing, regular conversations with mentors and agreed targets against which progress is measured.

At the end, the companies present their business to invited investors. The demo day is meant to prompt follow-on financing but does not replace a financing process of the company's own: interested investors carry out their own review afterwards. After the programme, the participants usually remain part of a network of former cohorts, through which contacts to customers, candidates and investors arise.

• Independent programmes finance themselves through their equity stakes and earn returns only when participants are sold or go public.
• Corporate accelerators more often forgo an equity stake and aim at pilot projects and cooperation with the corporation's business units.
• Publicly funded programmes generally do not ask for shares but are tied to funding conditions, such as a location or an industry.

Programme terms and legal implementation

Programmes with an equity stake usually work with uniform terms for all participants: a fixed amount in exchange for a fixed share. A valuation follows from this ratio, even if the contract does not state it. A company that receives EUR 150,000 for 6% accepts a post-money valuation of EUR 2.5 million, that is, a value of the company including the new money. If programme services such as premises or advice are offset against the amount, less liquidity flows to the company than the terms suggest.

For a GmbH (German limited liability company), the programme usually acquires its stake by taking over new shares as part of a capital increase. The resolution requires a majority of three quarters of the votes cast and notarial recording (Section 53 of the German Limited Liability Companies Act, GmbHG); the increase takes effect upon entry in the commercial register. Alternatively, the programme grants a convertible loan, which is converted into shares in the next round. Convertible instruments that are widespread in the US market, such as the SAFE, an agreement on the later acquisition of shares, are mostly represented in Germany through such loans.

Ancillary rights

In addition to the equity stake, many programmes secure further rights. A common one is the right to take part in future capital increases in line with their own percentage (pro rata right, see pre-emptive rights). Information rights are also usual and, for convertible instruments, a most favoured nation clause under which later more favourable terms also apply to the programme. Some programmes require rights of first refusal or consent requirements. These rights continue beyond the duration of the programme, often until a sale or an IPO (exit), unless they are renegotiated in later rounds.

The accelerator stake in the cap table and in later rounds

The programme is often followed by a seed round, an early financing round with smaller amounts in which a viable business model is sought. In this round and in every further round, the programme's share falls because new shares are issued (dilution). It remains visible in the cap table, the overview of all shareholders and their shares.

Investors in a Series A, the first larger round with professional investors, examine above all what share remains with the founders and the team after all conversions. They also clarify whether pro rata rights reduce the allocation for the lead investor, that is, the investor who leads the round and negotiates the terms. Finally, they examine whether ancillary rights restrict the planned round structure.

Every additional shareholder increases the effort of later rounds: it takes part in the newly drafted shareholders' agreement and is involved in every notarial recording. A programme with an affiliated fund that takes part in follow-on rounds, by contrast, can give new investors confidence in the company.

Worked example: accelerator stake through to the Series A

A software company in the legal form of a GmbH takes part in a programme that invests EUR 150,000 for 6% of the shares and receives a pro rata right. The founders then hold 94%.

• Valuation from the programme terms: EUR 150,000 / 6% = EUR 2.5 million post-money, that is, EUR 2.35 million pre-money
• Seed round: EUR 1.5 million at EUR 6 million pre-money gives EUR 7.5 million post-money; the new investors receive 1.5 / 7.5 = 20%
• After the seed round: programme 6% × 0.8 = 4.8%, founders 94% × 0.8 = 75.2%
• Series A: EUR 5 million at EUR 20 million pre-money gives EUR 25 million post-money; the new shares account for 20%
• The programme's pro rata right: 4.8% of the new shares, that is, 4.8% × EUR 5 million = EUR 240,000; EUR 4.76 million remains for the lead investor, provided the round is not enlarged
• Founders after the Series A: 75.2% × 0.8 = 60.16%
• Programme after the Series A with the pro rata right exercised: 4.8% × 0.8 = 3.84% plus 4.8% × 20% = 0.96%, together still 4.8%
• Value of the programme's stake at the Series A pre-money valuation: 4.8% × EUR 20 million = EUR 960,000

For EUR 150,000 and the programme services, the founders have given up a share that, on paper, is worth EUR 960,000 before the Series A. Whether participation was worthwhile depends on whether the programme made the seed round possible or improved its terms. The pro rata right shows how the programme co-determines the round structure of the Series A: it maintains its percentage while the founders' share continues to fall.

Distinction: accelerator, incubator and company builder

• Incubator: supports founding projects over a longer period, mainly with premises and infrastructure, and often forgoes an equity stake. An accelerator is shorter, more structured and more focused on follow-on financing.
• Company builder: develops its own business ideas and founds companies for them in which it holds large shares. An accelerator takes in existing teams with their own idea.
• Angel investor: invests as a private individual and negotiates the terms case by case. An accelerator offers uniform terms and a fixed programme.
• Venture client: an established company buys the product instead of taking an equity stake. Corporate accelerators combine both approaches by organising pilot projects with the business units.
• EIC Accelerator: a funding programme of the European Innovation Council of the EU. It finances individual companies with grants and equity investments following a multi-stage application procedure and, despite its name, is not a time-limited group programme with a demo day.

Common mistakes

• Valuation not calculated. Uniform terms contain a valuation. Those who do not calculate it compare programmes only by the amount and not by the price per share.
• Ancillary rights overlooked. Pro rata rights, most favoured nation clauses and rights of first refusal often apply until the exit. The in-depth review by the Series A investors (due diligence) captures them in full, and they are not infrequently renegotiated at that point.
• Offset services not considered. If premises, advice or programme fees are deducted from the investment amount, the liquidity available falls while the share given up stays the same.
• Several programmes in succession. Each further programme stake dilutes the founders and enlarges the circle of shareholders. Investors then ask why the company needed a programme again.
• Follow-on financing not prepared. If the cash runway ends shortly after the demo day, the company negotiates under time pressure. The follow-on round is therefore prepared during the programme.
• Lack of industry focus. Mentors and contacts are only useful if they know the company's market. A general programme does not replace access to customers in the company's own industry.

Frequently asked questions

How many shares does an accelerator require?

For programmes with an equity stake, the share is often in the single-digit percentage range. Publicly funded programmes and many corporate accelerators do not require shares. What matters is the ratio of share to service, that is, the implied valuation and the value of the support.

Is participation in an accelerator a prerequisite for a Series A?

No. Series A investors decide on the basis of revenue, growth, customer retention and the team. A well-known programme can make access to investors easier at an early stage but does not replace this evidence.

Is an accelerator worthwhile for companies that already generate revenue?

Only in certain cases. Companies with ongoing revenue and their own access to investors gain little from a general programme. An industry programme that opens access to customers, pilot projects or a new market can make sense, especially if it does not require shares.

How is an accelerator's stake implemented in a GmbH?

Through a notarially recorded capital increase in which the programme takes over new shares, or through a convertible loan, which leads to such a capital increase only on conversion. Whether the loan agreement itself must already be notarially recorded depends on its structure. The capital increase takes effect upon entry in the commercial register. The programme is then a shareholder and is added to the list of shareholders.

Can the terms of an accelerator be negotiated?

As a rule, hardly. Programmes with many participants work with standard contracts so that all are admitted on equal terms. There is more room for manoeuvre on ancillary rights and on the question of which services are offset against the investment amount.

The Roemer Capital view

Roemer Capital's mandates begin with funding rounds from EUR 1 million. Roemer Capital therefore encounters an accelerator in retrospect, when preparing a Series A and taking stock of the shareholder structure. It records which rights the programme holds, how conversions and pro rata rights change the allocation for the lead investor, and whether small shareholders issue powers of attorney for the notarial recording in good time. The legal review of the programme contracts is handled by the company's law firm.

In the equity story, the presentation of the company to investors, the programme background recedes behind the figures. Series A investors ask about revenue development, unit economics and a cash runway of 12 to 18 months at the start of the process, and less about the name of the programme. Roemer Capital therefore presents the programme stake soberly in the fully diluted cap table, that is, after all conversions and options. Before investors are approached, it clarifies which ancillary rights should be adjusted.