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

This episode is presented by invest Puerto Rico if you believe your business Can go anywhere Puerto Rico is the [Music] Place hello and welcome back to equity Techcrunch's Flagship podcast about the Business of startups I'm Maryann at And as you may have noticed we're Shaking things up here on equity and Today is no different instead of our Usual interview show today I'm joined by Tech crunch senior reporter Christine Hall and my new Equity co-host haa camps Christine haa hello so happy to have you Here hello hello it's so good to be here It's I'm so happy to sit here in this Very luxurious co-host Chair well it suits you well so Christine uh we are talking about a Story today that you and I worked on Together for months it was about an Accelerator that is now defunct called New chip was based here in Austin Texas Where I'm located and wow to say there Was a lot going on here is an Understatement yes this accelerator went Bankrupt or filed for bankruptcy last Year and you know the drama didn't end There all sorts of things have gone down Since then so we're here to kind of Dissect and discuss today it's been such An interesting thing to follow you you Guys covering this story so it seems Like a big part of the problem with this

Bankruptcy is related to warrants and You know I'm guessing we don't mean Police warrants here what are warrants And why does this matter in the context Of an accelerator yeah so to describe Warrants I'll try to simplify this as Much as possible so when they signed up For this accelerator program startups Granted new chip the right to buy $250,000 worth of shares in their Company at a later date but at their Current valuation so that type of deal Is known as a warrant now there was some Question about how explicitly this was Detailed to Founders when they first Signed on so when I spoke with the sales Agent he told me that not all of the Warrants were enforceable because the Company admitted to not having been Clear enough earlier on in the process But apparently revised language later so The warrants that were considered more Enforcable were ones that were granted Little bit late in new Chip's life and So if I understand that correctly then Is that basically these startups went in There and they said hey we want to be Part of this accelerator did they pay Money to be part of the accelerator yes Yeah some paid $7,500 a lot of people Told us that some people paid a little Bit less depending on what they wanted To do some paid more some paid more yes Yeah it ranged between a few thousand I

Think and up to over 10 15,000 depending On what they agreed to they were Promised things like like being Introduced to investors that was just One of the things that they were Promised and just kind of being helped Just to grow like coaching growing their Companies but I think one of the biggest Claims was we'll help you get introduced To the right investors yeah yes and that Didn't transpire for a lot of people in Fact a lot of the people that I spoke to Actually were having an okay time with The accelerator they were meeting peer Founders and having a good time and were Actually enjoying the conversations that They were having and so it was really Sad if you will to see it kind of Crash And Burn like that yeah totally I feel Like most of the accelerators I'm aware Of I've done a couple myself they either Give you money or they cost nothing so How did these Founders decide that it Was a good idea to pay money to an Accelerator yeah good question um Question I think that's one of the Things being called into question right Now is like why would companies agree to Pay money to an accelerator and did that Really actually pan out into anything Valuable for them so you know again There's a lot of mixed things going on Here some people said there was value in The program others said there weren't

That they didn't really get much out of It it depends really on who you talk to When the company filed for bankruptcy it Supposedly had about $4.8 million in Total liabilities $1.7 million in total Assets a lot of people said that Andrew Ryan who was the CEO was very smart but That his leadership style really kind of Hurt the company's growth there was a Lot of turnover employees ended up Walking out at one point I think it was Before the bankruptcy filing because They wanted him to step down as CEO and So there was just a lot of internal Problems that led to the company sort of Falling apart and also again some of the Customer complaints now one thing that Is kind of in question though is did the Company actually really need to file for Bankruptcy because all those warrants That we talked about were not taken into Account they were not listed as assets When the company first filed for chapter 11 debt reorg and then went into chapter 7 and they were not if they had been Listed as assets then maybe nuip Wouldn't have had to go into bankruptcy And then maybe all these people who People who claimed they lost money Either by not getting refunds or in Other ways wouldn't have had to be going Through what they went through so that's One of the things that's kind of being Called into question now and sorry I

Feel like we're going a little bit all Over the place but there's a lot of a Lot of moving parts here so why would They pay yeah you know I can't really Answer why they would pay I wouldn't say That all of them regretted it I would Say Obviously the ones we talked to yeah Did yeah and I'm not sure that they Could say that too also I'm not sure That they thought that that was wrong to Be honest with you I I think that they Thought that they were you know paying To get something and so I think maybe The complaint is more they paid and Didn't get something because like I said There were a lot of people who enjoyed It and they were doing just fine it was Until they wasn't doing fine that they Started to have a problem so they didn't Have a problem paying the money or else They wouldn't have paid it or they would Have not you know done the accelerator But they were seemed to be okay with it At the time yeah I feel like that's a Pretty common thing for contract law Though right you go into the agreements In the hope that everything will be good But the time you actually end up fine Reading your contract is when everything Is gone to hell and it sounds like that Happened here yeah I'm working on a Couple of other articles where I'm Talking to a bunch of people who went Through accelerators and all that kind

Of thing and it seems like a lot of the Accelerators that popped up especially In the Heyday of the last 5 years or so A lot of it is Amateur hour where it Feels like people like the startups are A little bit desperate maybe the Companies aren't as high quality so they Won't get into like a a y combinator or What have you and then they kind of go Well we need to learn this somehow and In that Universe maybe it makes sense to Pay $15,000 to an accelerator to learn These things but my experience with Those kinds of companies like when they Go and raise further funding later the New investors are like okay what is Going on with these Founders right it's Not like it seems like the founders Didn't really know what they're signing Up for which is a really big red flag For following funding yeah I mean you Raised a good point ha and I think That's part of the problem right now and What we were trying to cover in our Story is a some of these Founders maybe Didn't read the fine print closely Enough didn't understand what they were Signing when they agreed to let new Chip Have the ability to buy this you know Shares into their company and so how how That really backfired on them is when The when the company filed for Bankruptcy the court said okay well we Realize now you have all these warrants

Supposedly according to a study by a Venture fund here in Austin that was an Actually early investor in new chip they Claimed that the warrants were worth Just under $500 million so they decided Well you know we want you to be able to Pay back your creditors you're gonna Have to sell these warrants and so they Put them on the auction block which Imagine you're a founder you sign up for An accelerator you think you're going to Get introduced to investors and Hopefully raise capital and then find Yourselves where your company is being Auctioned off to the highest bidder and Let's face it not probably going to get Very much for these warrants this is What has happened this is why Founders Were outraged and why the story kind of Went crazy because people were just Horrified by this like being in this Situation even if you're a little naive Even if you're you know a little bit Amateurish you know Founders really Never expect that this is going to Happen to them and it's it's a lot of People in and social media said you know Take this as a cautionary tell be very Very careful when you sign up for any Kind of program read the fine print you Don't want to be in this situation there Were people who said look I signed up For this I asked for a refund I did get My refund but still that part of the

Contract was binding so they were still Facing their warrants being sold off to The highest is bitter and there there Were people who objected to the sale in Court and argued and fought their Objections were shut down and it's still Not over there are still about 1,400 I Think or500 that are going to be Auctioned off this summer and these Founders have the ability to object but The ones that objected earlier this year Were shot down so let's face it these Ones are probably going to be shot down As well yeah so I do a lot of work with Early stage companies and this kind of Thing is entirely unusual like I mean It's pretty rare right but occasionally You do end up with a cap table that's Not ideal shall we say but the truth is If you are a company that is making hay Right you're on an exponential growth Curve and you're doing great your new Investors will go to bat for you you Know ultimately it's 200k 200k on the Cap table whatever right if you were Becoming a multi-billion dollar company Would it be better if it wasn't there Sure but there are ways of negotiating That I think the companies that are Really heavily affected are the ones That are doing poorly and kind of medium Good because nobody's going to spend the Effort and money and heartache and Headaches of picking a fight in the

Legal system to clean this up and so I Think there's an interesting piece here Where you know yes this will probably End a whole bunch of startups because They're now deemed as incredibly high Risk but you know this is a business of High risk I feel like if there's 100 how Many companies are we talking about I Mean we're talking about thousands right So out of those thousands company there Will be a handful maybe a dozen that People will still figure out now the Thing that really sucks is that the kind Of people who sign up for this kind of Thing are often firsttime Founders right And you end up in this really nasty Situation where there's essentially no Way through because yeah and so as an Investor I'm like yeah cool you can deal With it if you have to as somebody who Works with Founders I'm like ouch this Is such a horrible situation to be Exactly Christine actually talked Firsthand with one of the founders about Their experiences and she'll share all The details around that but first a Short Break what's next in Tech that's not the Right question it's where Puerto Rico Where an entrepreneurial ecosystem Pulses with connectivity capability and Possibility where the most competitive Tax incentives in the US FasTrack Success and hard work is rewarded with

Sunsets and turquoise Waters if you Believe your business can go anywhere Puerto Rico is the place invest pr.org [Music] TechCrunch Christine talked to one Founder and I'll let you share that Story Christina Lacy Hunter yeah yeah Hers was interesting kind of touched on All of the things that you talked about Ha about she just essentially had to Shut down her company because she tried To get the warrants back she offered Money she was they basically said no What was was interesting was she Actually went and talked to other Potential investors and one of the banks That she went to actually worked with Her she said it was so amazing they Worked with her for so long trying to Figure out how to get her out of this Situation and at the end of the day they Just said you know what look we can't Risk your cap table having somebody on There that we can't work with as a bank And so we just can't you know we've Taken it as far as we can go and we Can't go any further with it and so she Was just like okay well I guess I have No choice but to you know shut it down Which to your point too not only did These people pay to get into this Program but that could have been a lot Of the money that they had so they don't Have you know another what $5,000 or

However it costs to to get a lawyer and To go to court and battle for the things That they have yeah and one thing I want To point out so the warrants are being Sold in three tranches the first one Involved 133 companies which had raised Collectively over $300 million in Funding the sales agent ultimately ended Up selling out of those 133 startups 28 Warrants in just four companies okay for A total of about $58,000 so that gives you an idea of What these warrants are selling for yeah Interestingly the successful biders and Two of the companies it was the Companies themselves that bought back Their own warrants in advance for $5,000 Each according to an agreement with a Trustee those ones were able to work out Something and then the others one was Palm Ventures was a buyer and then an Angel deal Syndicate formal name Angel Deal Syndicate purchased the bulk of the Warrant spending 43,000 on warrants in 24 companies so the second trunch which Is going to be sold this summer most Likely will include over 1,400 warrants For sale so basically whoever does end Up buying these warrants are probably Going to get a bargain but I guess one Might argue to your point haa I don't Really know the quality of all these Companies anyway so bargain I guess is a Relative term it is safe to say that you

Know they won't be paying that much Considering that those 133 had raised Over 340 million in funding and yet the Sales agent was only able to get about $58,000 in an auction I mean from the Buyer's point of view this is actually a Really interesting one right if you can Say okay here's $50,000 I want all the Warrants but it means you don't have to Exercise the warrants right so you're Just sitting there with the right to buy Of a company now if later you see one of Them is taking off like a scalded dog And it's like wait a minute this is the Next Facebook or Uber or Google or Whatever of course you exercise your Option that's when you find $200,000 Somewhere put it in the company but it Basically becomes this really Interesting spread betting kind of Futures type situation where you have a Right to buy something I mean I think From the buyer's point of view it's Super clever even though it really sucks For the startups who ended up in the Situation right I mean unless they get a Buyer who who actually is is willing to Invest in them and more than just buying The warrants but like maybe really Helping them grow or go on to raise more Money I think in general nup you know Just didn't keep up with the warrants Very well it actually according to a Person who served as an interim CFO for

The company after the initial bankruptcy Filing that the management hadn't really Kept up to them enough to the point Where they actually missed that some the Companies that went through the program Had exited or raised more money so the Claim is that new chip identified about $54 million in warrant value from Companies that had liquidity events that Should have been reported to new chip But were not so this honestly seems like A little bit of a hot mess all around Internally um before the bankruptcy Filing yeah that's wild just to kind of Broaden the view a little bit you know We've talked about tech stars on an Earlier show we've talked about a bunch Of other accelerators some of them good Some of them slightly more on the shall We say uh not good side of the scale is This a trend is this something that Startups should be on the lookout for or Is this kind of a blip on the radar that Is a oneoff I hope it's not a trend I Hope it's just a blip honestly you know That's a tough thing to say I know Tech Stars is a little bit different because It is a much larger accelerator program Than new chip for example and you know It had a really great reputation for a Long time I will say though that after Christine and I reported on new chip we Did get emails from people saying hey I Can tell you other stories like this so

That kind of makes me think that this This is I don't want to use the word Trend but it's not as uncommon as we Would think or hope unfortunately you Know I don't want to say that the people Who start these accelerators necessarily All have bad intentions I'm not saying That at all but I feel like if you're a Founder you're just having to be extra Careful in deciding what program you you Decide to get into and I think that's Why to be honest with you even though Why combinators had a lot of kind of Negative headlines here and there people Still gravitate toward it because you See YC companies go on to raise a lot of Money or become very successful or have Good exits or attract very well-known Investors so there's that credibility That still persists with YC and that's Why as stories like this keep coming out It's going to be harder and harder for Accelerators that are smaller and even The really honorable well-intentioned Ones might struggle to attract people Yeah well I think the truth that we've Seen for a long time is that there is Three or four accelerat that everybody Knows their names and they are the top Of the crop right that's if you going to Apply for an accelerator new chair Probably wasn't your first application Right right you did y combinator Tech Stars back in the day 500 startups and a

Bunch of the others that were very very Well regarded and then you kind of work Your way down the list and eventually You end up with one that will say yes But maybe as a Founder that's the Indication that maybe oh wait a minute I'm so far down this list now I'm like It's not Blue Chip anymore we're talking Like different types of accelerator Maybe that that's the way that maybe People need to spend a little bit of Time thinking well bottom line you have To deliver and that's why I saying you Know like bottom line I think the Accelerator programs have to deliver What they're saying you know I think for New chip they were telling us that they Were going to be able to meet the Investors at demo day well they didn't Make it to demo day so why weren't they Being introduced to investors from day One that would have been the more Prudent thing to do yeah I think in new Chip's case too let's be clear that There were a lot of struggles in terms Again the CEO was had a very harsh Leadership style that resulted in a lot Of turnover and I think that kind of Influenced the demise of the company or The accelerator program there's no doubt That that he was very intelligent and That the concept for new chip was not a Bad one but when there is a leadership That could be considered or was

Described as abusive and resulted in People for example one of the stories we Were told is of the managers was fired In front of his peers for not being Adequately prepared for a meeting and he Claimed it he felt like he was being set Up and was sort of humiliated whereas The CEO was like hey maybe that was Harsh but you know I viewed what he did Not being prepared as a Act of overt Subordination so this kind of gives you A little bit of a sense of the way this Company was run it seemed too like he Was putting his focus into things that Were not something that needed to be Focused because as you mentioned Maryann They completely missed all of these Exits and things that they should have Been paying attention to but in fact He's paying attention to people not Coming to a meeting with proper research Or you know ready to present or Something and I think that that's a not Something that he should have been Focused on and rather focused on some Things that would have helped the Accelerator get where it needed to be Yeah well and and it's an interesting Thing right there's a lot of people who To your point from earlier Maran there's This thing like nobody goes into this or Hopefully nobody goes into this with Like nefarious thoughts mhm but Incompetence you know there's a famous

Saying don't ascribe to malice that can Be ascribed to incompetence and I feel Like that is happening in a lot of Especially the smaller accelerators Where people have a lot of like they Want to make an ecosystem happen they Want to build something with these Startups and it's true that a lot of Things about running a startup is kind Of universal so you can teach that Universally but startups are startups And every one of them has different Needs different skill sets different Experiences different everything and It's incredibly hard to customize a Accelerator to something that works for Everyone and so I think it's really Fascinating to see how this one fell Apart and how others I've got some Interesting stories in the hopper when I Had published on those we'll have Another one of these conversations but What I'm saying is that I wish it was a Way for Founders to really learn what to Look out for and hopefully this podcast Can help with that but also every new Pitfall is a new Pitfall yeah I mean it It's a tough thing right when you're a Startup founder and you're early in your Process and you're excited and you have Hope and this there's someone kind of Promising you these all these great Things it's easy to get caught up in That and buy into it so yeah I think the

Advice we can just offer is do take the Time to be very careful to read language And anything you sign and if that means Spending a little bit upfront to get a Lawyer to look at something maybe it's Worth it then potentially you know being In the situation than a lot of startups That went through the new chip program Have found themselves in yeah and I Think the extra important thing to note There is anything to do with Equity Anytime you give up shares in your Company that's a time to pause think and Think it through because there is no Easy way to get somebody off your cap Table yes like once you have somebody Who is part of your company that way Like legally it is almost impossible to Remove them if you sign a contract with The wrong people there's no way of Undoing that and that's incredibly Painful for for startups yes exactly Yeah where where you could One Day end Up having investors on your cap table That you never would have dreamed Dreamed of or have agreed to if you'd Had a choice so okay well we're going to Have to wrap this up today but Christine And haa thank you so much for being on This show with us this week and talking Through this with me Christine please Tell our listeners where they can find You and read more of your amazing work Yeah thank you for having me you can

Find me on X and Linkedin and of course The tech Crunch website what's your Handle on it x x is Christine M Hall Real easy ha what about you uh well I Write for this wonderful website called Tech crunch so come find me there and I'm on X on haa awesome and haa you will Be hearing more of because we will be Back with equity on Friday with our Weekly news Roundup and he's going to be On the show every week we're going to be Riffing and talking about all the hot And exciting and not so great stuff Happening in the startup World until Friday you can find us under the handle At Equity pod on X and threads don't Forget to check out our sister show Found which Dives deep into the stories Behind startups with the founders who Built them thanks for listening [Music] Bye Equity is produced by Teresa loow Consolo with editing by Kell Bryce Durban is our illustrator and we'd like To give a big thanks to our audience Development team and Henry pet who Manages Tech crunch audio products Thanks so much for listening and we'll Talk to you next time