Nano VC

Have any of you seen a standard Australian incubator termsheet? (for investment into a startup)

Similar to VCs they overpay for control (veto) rights, but on tiny, tiny investment increments.

And they often insist that existing fully paid common stock gets reverse vested – over a period about 5x the time it will take the company to burn through their  investment, leaving the founders a nasty legacy to unwind with later investors.

A truly bizare starting point by which to start a trusting relationship with founders and executive, since they will be relying on this trust to protect their investment later on in rounds that they can’t participate in.

My concern for the startups that sign up for these deals is as always, the problem of ceding control to investors without follow on capital.

They also have a put option were they can get the company to buy back their shares at any time, making the investment a sort of reverse con note, unsecured but with control rights. Weird.

They generally behave to structure deals to protect their investment which results in non standard behaviour, adding massive risks to next round funding.

Unlike the US there isn’t a functioning investment ecosystem in Australia. So the usual relationships between incubators and larger investors, that get sorted in the US, simply don’t exist.

These deals start funky and probably end in tears or a long painful path to SME-dom.

If I was these incubators I would put my money in as a con note and just get over the idea of exercising investor control. They rarely have either the skills or the bandwidth to do so anyway.

Ethically, they are better placed as viewing themselves as vaguely institutional angel mentors and not nano-VCs.