How does 500 Startups structure its investments?

[***UPDATED MAY 2015***]

Overview
500 Startups does both priced rounds and convertible notes or convertible securities, in either case almost always with a cap. We are flexible on structure, altho in specific situations we may prefer one form over another. 

Our KISS docs are available free for anyone to use and review here: http://500.co/kiss

Regardless of structure, we always ask for information rights & pro-rata rights, so that we know how the company is doing, and so we have the option to invest more in the future if the company continues to make progress.

Also, for both convertible debt or convertible equity, we ask for a minimum 2x return if companies exit prior to closing a priced round (note: this clause doesn't matter if the exit value is >2x the cap). This 2X min return rqmt goes away if/when the company does a qualified $1M financing, thus it is *NOT* the same as a 2X liquidation preference in a priced round (which stays in place forever, and requires  investors be paid ahead of common shareholders).

In most cases, we cover legal costs for producing & preparing docs, for both ourselves & our companies (note: many VCs do exactly the opposite, and charge the company for all costs, including the VC's legal fees, not just those for the startup). However, if it is a priced round requiring more lengthy or complicated docs, or if it's a non-priced round and the company wishes to negotiate our standard terms, then we will expect the other party to cover their own legal costs.

Independent of document structure, we aim to optimize for 1) finding great founders & great companies, 2) speed of getting shit done, and 3) limiting cost & complexity. We hope that legal structure never prevents us from finding and funding great people and startups.

500 Startups Accelerator
As of July 2015, we now invest $125K in exchange for 5% equity for our US-based accelerator program. We also charge an accelerator program tuition of $25K per company, which is deducted out of the $125K investment, resulting in $100K net cash to the company. We do this in order to cover overhead and expenses for managing the program (note: we aren't getting rich on tuition fees; it costs us ~$4-5M/yr to staff & operate our 2 US-based accelerator programs, and we run barely break-even, if that).

To clarify: our *FUND* invests $125K, and our *ACCELERATOR* (separate LLC entity) charges a $25K program tuition. The amounts are handled separately so that the fund doesn't generate non-investment income, which could jeopardize the tax status of our fund / have negative impact on our LPs.

In addition to the initial $125K, we have an option to invest up to another $500K (but not to exceed 20% of the round) in a future financing, typically in a priced seed or small Series A round of ~$1-3M.

Note: we also accept companies in our accelerator program that have already received seed financing of $500K-$2M, sometimes on terms that are a hybrid of ours and theirs. However, we will still expect to receive a minimum of 3-5% equity for participation in the program.

Most companies don't already have any previous investment, and so we usually help them raise a small advisory round of $50K-$500K before demo day, where we may sometimes participate. On / after demo day, most companies aim to raise ~$500K-$2M, and again we may participate as a minority investor for $100-500K in the round, however we almost always follow other lead investors who set terms & valuation.

Seed Stage & Series A/B Rounds
In most Seed & Series A rounds ranging from $500K-$5M, we typically invest ~$50K-$250K on our 1st check, and ~$100K-$500K on following checks. Again, we may invest on either a convertible note or a convertible security with a cap, or in a priced round led by another investor.

Our docs may also be used by other investors in the round, and/or may convert into a priced round led by other investors. In a small # of cases, we may lead the round, and even more rarely we may take a board seat (however this happens in <1% of our overall portfolio). More typical is for us to be a smaller, non-lead participant in financing rounds that occur at or above $1M.

Follow-On Investing

500 Startups does selectively invest in follow-on rounds, altho not by default, and if so we rarely lead in a majority investor role. We are almost always a minority investor, and usually invest less than 10-20% of the overall round. This avoids most signaling issues, and still requires primary decision-making to come from another downstream lead investor.

That said, we occasionally lead rounds in some cases where other investors are less bullish. To be frank: we don't believe signaling really matters much... the fundamental business metrics are far more important than any investor opinion (or if not, then you have other problems ;)

In almost all cases, we optimize for getting deals done quickly at low cost with people and companies we like, rather than preferring a particular form of documents. Legal docs and forms should never become an obstacle to making an investment in great startups or great founders.