Incubator Equity and Royalty?

I'm considering applying to a local incubator, and wanted some quick feedback regarding the following terms (assuming I get in). I've started by bootstrapping, and feel as though I need to dedicate fulltime to my product, but I'm currently employed fulltime and have a mortgage/wife to pay for, so this would give me a few months of breathing room.

You receive $25k, free office space, and mentorship/introductions over 3 months for an eight percent equity stake in the company and a royalty of 2.5 percent, capped at $150,000.

I'm not familiar with what the royalty component is, but 8 percent seems to be about average for incubators.

Any thoughts on whether this is good or bad? Has anyone participated in a similar situation?

Any and all advice/feedback is appreciated. Thanks!

Let's consider the offer this way:

1. The incubator is paying $25-30K for 8% of your company: that values you at $350K pre-money. That could be a reasonable valuation for many seed-stage companies, depending how much you do or don't have to show for yourself so far (any traction or just a prototype product?).
2. The incubator is asking for a 2.5% royalty in return for making introductions for you, capped at $150K total. That is a reasonable royalty ... if it is a royalty payable only on introductions they make.

I'd want to get a lot clearer on the royalty to understand if it is fair or not: that is very non-traditional. All the other terms could be fair or not, depending. They are not outrageous at first glance.

The real question you should be asking yourself is what value the incubator delivers. Will they cause your value to double? Will they have a group of investors who line up to write cheques when you graduate from the program? You should ask a lot more of those types of questions from them. Ask them to give you a list of all the companies who graduated from the incubator; ask what percent of them got funding, how may months after graduation; randomly call up and interview the CEOs of a few companies (not those they select) and ask how the experience was; etc.

P.S. In my view, three months is a great amount of time. If you are highly focused and driven for three months, you can accomplish a lot!

What a SCAM! Dont do it! 3 months is way too short a period to get anything accomplished. And 8% is way too much to give away for Desk space. THe mentoring and coaching you can get free on sites like this, or pay a business coach, cpa, and others. To tell you the truth, most successful entrepreneurs are so passionate about building businesses they give this advice away from free.

All you could expect to get from an incubator is "connections" for funding at the second round. If someone owns 8% of your company, they have a vested interest in making sure you go to the next stage so they can cash out. THIS DOES NOT MEAN THEY CARE IF YOU ARE SUCCESSFUL.

Bootstrap on your own. You can afford a corner of your house or apartment to setup a work space. Less distractions than being in a co-work space anyways. (Trust me you will get little work done). If you are going for funding, take a step back and make sure you dont borrow a dime unless you have to. If your idea is something you can do with your own money, or startup on the cheap then you dont need their 25k for 8% stake.

To me the guys that do these 25k for almost 10% of your company remind me of Suge Knight and the other rap producers from the 90s who would find the talent, give them a gold chain (25k), 3 mos in the studio and then own them. Their priorities are far differnt from yours. If your idea is a good one, you can build it on your own, fund it on your own (through friends, cashing out a 401k or some other means).

PS if you build it on your own (without the 25k) and then need 25k to sell your product, you could probably raise 25k for a smaller chunk than 8%. Meaning the later you borrow money the less you will be bent over. And if your idea is something you can do online chances are you can make enough to financially bootstrap your business and never have to borrow a dime.