Accelerators are among business institutions that are involved in law. Most parts of these entities have not been localized in Iran including the legal side. In the previous parts of this article, I took a quick look at the history of Iranian accelerators and analyzed some of their general practices. In the last part, I will explain some of the major legal issues in the Iranian Accelerators.
Iranian accelerators didn’t develop from incubators or E-accelerators; they didn’t have a series of tested contracts. What did they do for their legal instruments? They borrowed it. They borrowed these contracts from fully developed accelerators.
This article has been written for TechRasa. All statistics cited in this article have been extracted by the writer from the Official Magazine of I.R Iran. Statistics in this article are not official.
This article focuses on general practices and not the individual ones. Of course, there are also many flaws in individual practices. For example, something that caught my attention lately was that an accelerator was established as a “Non-Commercial Institution” but its statute states that it can establish an “Accelerator Company” and “Investment Funds”, and 23 other activities which all of them are commercial activities. Here is the irony: you can’t do commercial activities with a non-commercial entity. The title is very clear; it is a “Non-Commercial Institution”. Sadly, this accelerator has two legal entities among its shareholders with the high amount of capital. Apart from this example I’ll be mainly focusing on general practices.
Borrowed Accelerators and their legal flaws
Here is a list of legal problems with these borrowed institutions:
- When you establish a company, you have to determine what this company does. In the other words, what the subject for the company is. In Iran laws, there is no definition for “Acceleration”, “Accelerator”, or “Startup”. Thus when founders determine “Startup Acceleration” as the subject of the company in the statute, there is no way to determine what this activity is. Is the company allowed to rent a place? Is the company allowed to do advertisement and marketing? Is the company allowed to hold workshops?
- This argument sounds important due to the following statistics:
- From all 73 acceleration companies established since 2016:
- 25 companies have the word “Accelerator” in their title.
- 9 companies determined “Startup Acceleration” as their subject.
- 20 companies determined “Acceleration Services” as their subject.
- 53 companies determined “Accelerator” as their subject.
- From all 73 acceleration companies established since 2016:
- Imagine that if one of these companies builds a building and rents it to 50 companies; per room per company. If a dispute arises, how can you prove that this activity is an Acceleration activity? How can you tell if each leaseholder is a Startup? As a lawyer, I can argue for both negative and positive answers but this question shouldn’t become a legal threat.
- Now if I want to solve this problem, I will argue that:
- One- we know what an incubator does. It is in the “Development Centers and Science and Technology Parks” Act.
- Two- According to this Act, an incubator offers services such as: Renting a Place, Laboratory and Workshop Facilities, Financial Supports, Educational Services, Management Services, Legal Services and Marketing.
- Three- at the minimum scale, an accelerator is allowed to do these activities. But here is the problem: about 94% of the Iranian Accelerators determined “Acceleration Services”, “Startup Acceleration”, or “Accelerator Activities” in their statute alongside with all other activities that fall into the category of acceleration services.
- Thus for example when a company decides to provide “Renting, Laboratory and Workshop Facilities, Financial Supports, Educational Services, Management Services, Legal Services, Marketing and Acceleration Services”, it means that these services are different from each other.
- This situation is vaguer in those companies that have determined “Accelerator” as their subject. As I mentioned before; 53 companies determined “Accelerator” as their subject. So when you see this in a statute, what does it mean? Is the company allowed to create an accelerator? Or “Accelerator” is another thing like an object that this company is allowed to create it?
- The accelerator’s success largely relies on the quality of the startups it selects. One of the suggested frameworks for this selection is to answer three questions: 1- Is it real? 2- Can it win? 3- Is it worth doing? (Bangqi Yin and Jianxi Luo, 2017.)
- As I witnessed, less than five accelerators in Iran use an actual regular score system to evaluate their startups. There is no mention of the selection process in their contracts; all startup’s obligations start from the beginning without considering the fact that this startup might not pass the test.
- With respect to this point, two sets of obligations that are repeatedly inserted in these contracts are: 1- The accelerator demands a percentage of the startup’s shares. 2- The accelerator possesses all controlling options in the startup. Despite the challenging nature of these provisions which I’ll mention later, these provisions have some consequences with respect to the evaluation phase.
- They demand a percentage of the startup’s shares in the contract but there is no provision for the counter situation. What if the startup didn’t make it? Lack of a provision for this situation means that there is no actual evaluation because the accelerator doesn’t think of this situation. Moreover, with the lack of any provision to handle this situation, if the shareholders can’t reach a settlement about the accelerator’s share in the startup, there is no way except dissolution.
- The accelerators obtain some shares from any startup that applies to them (hopefully there is a pre-acceptance evaluation) whether the startup can make it or not. This has a significant effect on their taxes. Despite the fact that they have to submit combined and consolidated financial statements, having shares in another company means higher tax and the more accelerators own shares in different companies, the more their tax increases. So not only in reputation but also in actual financial burdens it is necessary to consider this situation in the contracts.
- Now combine these problems with the provisions that provide control for the accelerator over every decision in the startup. As strange as it sounds, many Iranian accelerators are like this.
- Review all the above-mentioned problems in the case of inability of the accelerator to make a decision; for example, because of structural problems which I mentioned earlier, the accelerator couldn’t make a decision or because of its weak decision-making process, the Board of Directors runs into a deadlock.
- These problems rationally can convince startups to design a mechanism that works actually in favor of improvement. I heard some voices about designing a versatile system in the shape of an accelerator managed by startups. This can be a milestone for a localized accelerator.
- Back to the percentage of shares, it became a widely accepted practice among Iranian accelerator to demand fifteen percent of shares from each startup. This provision is also a borrowed one and this amount is twice higher than what accelerators normally ask for. Iranian accelerators borrowed this provision from those accelerators that offer vast content of financial services. Even in these accelerators, the percentage of shares they ask for is half of what Iranian accelerators are getting. Why should an accelerator that offers some services in the scale of an incubator take over fifteen percent of shares in a startup company?
- Besides these general rules, there are some other inconsistencies in their legal instruments but since they are not so epidemic, they can be the topic for another article.
- For the final tip in the current situation in which the Iranian accelerator takes control over their startups, they can start connecting their portfolios to each other to create a sound network and fulfill the “Acceleration Duty”. This is a perfect idea but remember that you can’t borrow anything from anywhere because almost every instrument has an obstacle in Iran laws.