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Newchip's bankruptcy is a cautionary tale for founders | Equity Podcast

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Newchip's bankruptcy is a cautionary tale for founders | Equity Podcast

Newchip Accelerator Bankruptcy and Controversy

  • Newchip, an Austin-based accelerator, filed for bankruptcy, sparking disputes over warrants granted to investors to buy shares in participating startups at a later date.
  • Some founders allege a lack of clarity in explaining the warrant terms, while Newchip claims to have revised the language later.
  • Despite charging startups $7,500-$15,000 for introductions to investors and growth opportunities, some founders felt they received limited benefits.
  • Questions arose about the necessity of bankruptcy since the warrants were not initially listed as assets.

Warrants and Legal Battles

  • The warrants were valued at nearly $500 million, and the court ordered Newchip to sell them to repay creditors.
  • Founders expressed outrage as their companies were auctioned off, emphasizing the importance of understanding contracts.
  • Despite objections, the sale of warrants continued, with around 1,400-1,500 still set to be auctioned.

Impact on Startups and Investors

  • Many startups that participated in the program are struggling and unable to raise additional funding, making the warrants essentially worthless.
  • Some investors are buying up the warrants at a discount, hoping to profit if any of the startups become successful.
  • First-time founders, in particular, face challenges navigating the legal complexities of the situation.
  • Newchip's alleged failure to properly track and report on the warrants added to the complications.

Accelerator Practices and Reputation

  • The incident raises concerns about the practices of some accelerator programs and highlights the importance of careful evaluation by startups before joining.
  • While reputable accelerators like Y Combinator maintain a strong reputation, smaller programs may face difficulties attracting founders due to negative publicity.
  • Accelerators need to deliver on their promises and provide tangible benefits to maintain credibility and attract high-quality applicants.

Newchip's Internal Challenges

  • New Chip accelerator faced challenges due to the CEO's harsh leadership style, resulting in high turnover.
  • The CEO's focus on minor issues rather than crucial aspects of running the accelerator led to missed opportunities.
  • Incompetence, rather than malicious intent, is often the cause of accelerator failures.

Advice for Founders

  • Founders should be cautious when signing agreements, especially those involving equity, as it can be difficult to remove someone from the cap table once they are part of the company.

Equity Podcast Information

  • Listeners can find Christine Hall on Twitter and LinkedIn, as well as on the TechCrunch website.
  • Equity podcast will return on Friday with a weekly news roundup featuring Haa.
  • Equity is produced by Teresa Lo, edited by Kell Bryce, and illustrated by Durban.

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