There have been a few questions about the L-SPARK business model, so I would like to take the time to review first the model our team has come up with.
On our current site it says:
L-SPARK will receive equity in the start-up proportionate to 4% of the total investment round.
For example, if the start-up receives an investment of $5,000,000 for Common Shares with a price per share of $1 by the investor, L-SPARK will receive 200,000 Common Shares.
The 4% solution refers to the fees that L-SPARK receives for the services it provides to the start-up during the session.
There are many different models used in Accelerators; a few of the most common are:
Seed Funding Model
“We have a new standard deal - we'll invest $120k in return for 7% of the company's equity.”
This model provides the start-up with ‘survival money’ during the session but it also sets the valuation of the start-up to about $2M post money value. This provides context for further investments and depending on the start-up’s progress, it may impact future valuation offers for better or for worse. However, if the progress is too slow, the start-up will run out of money before reaching its next fundable milestone and will go into a tail spin.
Convertible Debt Model
A second alternative model is the Convertible Debt Model and its variation called the SAFE Term sheet. The CD model is used primarily where the valuation is undefined and is relegated to a later time, for instance when the company closes a Series A round. The amount invested is converted into the Series A shares, with some discount. The CD is a debt instrument and will carry interest, it may be unsecured or secured, and may have other special terms. The SAFE can be viewed as a simplified CD with no interest and few special terms. Using this model as a way of engaging with an accelerator provides ‘survival money’ but if, at the end of the session, the start-up is unable to secure further investment, it become ‘hostage’ to the CD owners.
The L-SPARK 4%
Now let’s discuss the features of the L-SPARK 4% solution.
On one side, the company has to enter the program with its own ‘survival stash’, since we provide no funds to the company at the beginning. This means that start-ups will either have sufficient funds to survive the 9 month session, or are expected to raise seed money from external investors to continue operations. In order to raise such funds, L-SPARK provides facilities, hands-on mentoring, and frequent investor sessions. It is our expectation that through these services, the start-up will raise funds to support its growth, leading to engagement with interested Series A investors towards the end of the session. Using this model, the valuations are market-set, rather than arbitrarily predetermined. If the company does raise funds, it will be able to pay for the L-SPARK service at a rate of 4% of money raised. Of even more importance, L-SPARK’s objectives and the start-up’s objectives are fully aligned, to accelerate the growth of the company and become investable. The better the performance, the higher the market assigned valuation, and the amount raised will always be driven by the growth aspiration of the company.
On the other side, if the start-up is unable to raise any money, L-SPARK will not be the owner of any debt or equity in the company, allowing each to carry on independently.
We believe this model serves both the interest of the Entrepreneur and L-SPARK equally. If you have an interest in our programs, we are currently taking applications for our Accelerator program. We want the best in Enterprise SaaS startups! Don’t miss out, apply today!