Equity Back Guarantee: Reflections Two Years Later

September 6th, 2016

3-min Read

By David Cohen, Founder & Managing Partner of Techstars

In 2014, we announced the Equity Back Guarantee (EBG) at Techstars. In a nutshell, anyone who wasn’t satisfied with their accelerator experience and the value we provided was offered the option to take their equity back in exchange for giving us feedback to help us improve.

To us, it felt like an obvious and logical instantiation of #givefirst — a core value at Techstars tied to our belief that startup ecosystems thrive when people prioritize adding value to the whole. Since it’s been about two years, it seemed like a good time to share our reflections on how this has gone so far.

Since we announced the EBG, 326 companies have gone through our accelerator programs. Eight of those (about 2.4%) have invoked the Equity Back Guarantee.

Of the eight, half of the EBG cases were true cases of dissatisfaction with the outcome. All four of these have been at our thematically focused accelerators that are run in partnership with corporations. In these cases, the startups came in expecting to land big business development deals but weren’t able to do so for various reasons. We view this as a legitimate use of the EBG as it is a failure of Techstars to ensure alignment between the corporate partner and that particular startup.

If the sole motivation for participation is an expectation of a business deal with a corporate partner, it may not be the right fit. We now communicate that founders applying to a accelerator program should do so with the goal of growing their company in multiple powerful ways – including, but not just limited to, business development. Large companies sometimes move slowly and a result –  strategic partnerships take time to develop, even with the luxury of direct relationships with key corporate executives.

What we’ve learned from this is to set better expectations with founders up front and let them know that while they will be able to establish meaningful relationships with corporate partners, there’s no guarantee of a business development deal in any specific timeframe.

In the other four cases, the companies asked for equity back because legally they were allowed to do so. In other words, based on their feedback, these four were actually completely satisfied with Techstars. We realized that three of these four companies went into the accelerator planning in advance to pay less. For these three, we viewed it as a failure of ours to set proper expectations up front. They had misunderstood the equity back guarantee as “pay what you want.” In response to this, we’ve been careful to make sure people have appropriate expectations and understand that the EBG is recourse if they feel that the Techstars experience didn’t meet those expectations.  

In only one of these four cases, we actually felt as if we had been wronged. That particular company actually understood the intent, and didn’t care. They were attempting to optimize their position based solely on advice from their lawyer. We viewed that one case as an extreme anomaly and a failure in our selection process. Because we are focused primarily on the people, their integrity is something we clearly misjudged in that single case.

Another fascinating element to the EBG is that companies may not want to execute on it for fear of damaging their reputation in the network.

We have a deep commitment to not penalize a company that executes the EBG.

We make no attempt to talk them out of it. We simply listen to the feedback and execute on their request. Our intention is that the companies who have exercised the EBG still feel supported by the network and we take care to ensure this is the case.

With a 98% non-redemption rate, we view the EBG as a huge success. It’s part of our ethos at Techstars.

We’re not interested in having equity that founders don’t feel we’ve earned.

We have a strong desire to continually improve, and the data we get from the EBG helps us do that. It also ensures that everyone who is an alumni of Techstars feels like it was a fair and valuable exchange. We plan to keep the Equity Back Guarantee in place as we continue to grow and believe it will be continue to be an important way to continue to monitor and improve our own performance.