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Few incubators take equity in client companies; however, interest in the subject never wanes. NBIA interviewed members across the spectrum, from those who advocate taking equity in clients or graduates to those who discourage it. Read on for both perspectives.

Weighing the costs and benefits of equity and royalty agreements

August/September 2012

by Bridget Lair

NBIA ReviewTaking equity in client companies or making royalty arrangements with them can be risky business for an incubator – and determining if the risk is worth the return depends on the incubator’s client base, economic standing and available expertise. It can make sense for some incubators, but not all.

The majority of incubation programs in North America don’t take equity in their clients. According to the soon-to-be-released, 2012 State of the Business Incubation Industry report, a survey of 235 North American incubation programs, 4 percent of respondents take equity in all their clients, 14 percent take equity in selected clients and 82 percent take no equity position in client companies. Yet interest in the subject never flags.

Regardless of an incubator’s position on equity investment, incubation programs still need advisors who understand start-up finance so they can effectively assist clients who are ready for outside investment.

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Keywords: Equity and royalty agreements, Access to capital, Client services – general

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