A syndicate allows investors to co-invest with other notable investors. People who back a notable investor's syndicate commit to invest in their future deals, and agree to pay them carry.
Backers get access to dealflow, leads get carry and startups get access to capital.
Backers get access to the lead's dealflow and benefit from her experience in picking and managing investments. Backers can invest much less than the startup's minimum for a direct investment.
Leads get carry and leverage on their personal investments. They get to invest 5-10x their typical investment amount, which gives them access to more deals, allows them to lead more deals and provides access to startups with higher minimum commitments. Their larger investment amounts may also bring major investor rights. Finally, leads get access to their backers' networks so they can provide additional value to their investments.
Startups get more capital with fewer meetings. They get the attention of an investor who is committing 5-10x their typical investment. They get access to the backers' networks without putting each one on the cap table. And they can collect many small investments without a lot of hassle.
Here's an example.
Sara, a notable angel, decides to lead a syndicate. Investors ‘back’ her syndicate by agreeing to invest $200K in each of her future deals and pay her a 15% carry.
The next time Sara decides to invest in a startup, she asks the company for a $250K allocation. She personally invests $50K in the startup and offers an opportunity to invest up to $200K to her backers.
Yes. Non-backers can make reservations in syndicated deals, very much like making a reservation in a company that is self-syndicating.
Non-backers invest in the same fund as the backers and the syndicate lead. Non-backers also pay the same carry as the backers.
When a deal is oversubscribed, backer reservations generally have priority over non-backer reservations.
AngelList will put all syndicate investors through the appropriate accredited investor screening (either self-certification for 506b financings or reasonable steps to verify for 506c/general solicitation financings).
More information about our verification process for 506c deals is here.
Carry is shorthand for carried interest.
Carry is a percentage of the profit of a fund, if any. For syndicate deals, if a company’s exit returns a profit for investors the syndicate lead receives a percentage of the profits paid to her backers.
Syndicate investors don't invest directly in the company but a special purpose vehicle LLC that is created for each specific investment. The fund is managed by Assure Fund Management and advised by the lead and AngelList Advisors, LLC, a wholly-owned subsidiary of AngelList.
AngelList Advisors and the lead receives the carried interest as Special Members of the syndicate.
The lead is required to advise the fund, tell the fund how they voted (or would vote) their shares and if they buy or sell shares. The fund will generally follow unless there's a good reason not to (e.g., conflict of interest).
Carry for venture funds is calculated on the outcome of a portfolio, meaning the upside in some deals must first pay back the losses in others before any carry is paid. Carry in a syndicate is calculated on the outcome of an individual company. In short, backers gain the flexibility to choose which companies and syndicate leads to invest in while paying a small carry premium versus venture funds.
If a backer invests in multiple syndicate deals, she may be paying approximately 1.4 - 1.5x higher carry on her portfolio versus the traditional fund model (exact differences depend on the distribution of returns). This premium exists because syndicate leads do not have to return capital to cover their losses.
Based on typical fund performance, deal-by-deal carry is equivalent to approximately 1.4 - 1.5x the carry on a venture fund.
Here is an example to explain the difference:
DEAL BY DEAL (Syndicates)
Over the course of five investments, $500K was invested, $1.2M returned, and $200K went to the lead as carry.
TRADITIONAL VENTURE FUND
Over the same five investments, $500K was invested, $1.2M returned, and $140K went to the firm as carry because the firm only returned $700K in overall profit after returning capital on the losses.
|5%||7 – 7.5%|
|10%||14 – 15%|
|13.3%||20% (typical venture firm)|
|15%||21 – 22.5%|
|20%||28 – 30%|
Due to securities regulations, only 99 accredited investors can invest in a syndicated deal.
Qualified purchasers investing through a different fund do not count towards this limit. Qualified purchasers include (1) individuals with over $5M in investments and (2) trusts or companies with over $25M in investments.
For example, a single syndicate can accept an infinite number of qualified purchasers investing through one fund and 99 non-qualified—but accredited—investors investing through another fund simultaneously.
The syndicate lead can choose whether information about the deal will be made available to specific backers only, to the general AngelList investor community, or (with the company’s permission) to the general public of even logged out AngelList users and the press.
Regardless of who sees it, the lead, along with the founders, will ultimately pick which investors can participate.
Startups pay nothing to receive an investment from a syndicate.
Backers pay 5-20% carry, per deal, to the syndicate lead, and 5% carry to AngelList.
Backers also collectively pay the out-of-pocket setup costs for each investment: $8K in the US and £8,300 in the UK. AngelList does not receive any of this money – it is paid to third parties such as state regulatory agencies, payment processors and accountants.
AngelList and the lead investor do not receive carry until the backers’ investments and out-of-pocket costs are returned.
To create a syndicate, click the Syndicate tab. You'll need to fill in some basic information for backers, including how many deals you expect to syndicate each year, and your normal investment size.
To syndicate a deal, hit the "Syndicate a Deal" button in the lower right of the Manage Syndicate page.
Syndicate leads commit to providing a written investment thesis for each of their investments and disclosing potential conflicts of interest such as warrants, advisory shares or an investment in a previous round. They are also required to make a significant investment in each of their syndicated deals, and to review and screen potential investors in each deal.
Leads will need to sign a side letter making them an independent contractor of AngelList Advisors, our advisor entity.
Leads are not required to syndicate every deal they invest in.
Leads should be prepared to field inquires from backers about their investments, even though backers have limited information rights.
Any accredited investor can apply to back a syndicate. Leads can then accept or reject them. Leads can also remove a backer at any time.
Leads should consider accepting only experienced investors, people they trust and people they want to work with. Experienced investors will be less likely to stop backing a syndicate or opt out of a specific deal. Inexperienced backers may also have unrealistic expectations about the returns they will realize on their investments.
Yes. To do this, select the option for "only my backers" when you request to syndicate the deal.
Each backer will be reduced pro rata.
Here's an example: Sara has a syndicate with 10 backers. Each of them back her for $10K, for a total of $100K in backing. She personally invests $20K in a startup and asks for an additional $100K for her backers. However, the startup is only able to allocate an additional $50K for her backers. Because her total backing is larger than the additional allocation, each of her backers would invest $5K instead of their usual $10K.
If a backer's reduced amount is less than the minimum investment for a deal, the backer will invest the minimum investment.
If the reduced amounts still exceed the syndicate's allocation, the lead will exercise judgment to reduce backers' investment amounts for that deal—the lead will likely favor backers who have expertise in the startup's markets and have large backing amounts.
Yes. Individuals and VC funds can both form syndicates.
If a fund has its own LPs, the lead should check if their LP agreement allows them to form a syndicate. If it does, any carry the lead collects from a syndicate can be distributed to the fund's GPs, LPs or split between them.
Most leads use their own name as the name of the syndicate. They are syndicating their investments and people know who they are.
However, if you are investing on behalf of a firm or focus on a specific type of investment, you can name your syndicate something else.
Other investors should be able to clearly tell who is running the syndicate from the syndicate's name. Moreover, the name should not be overly generic or contain the word "Syndicate".
"FG Angels" is an excellent name for a syndicate. "Angel" is not.
"Hardware Investments by Steve Jobs" is an ok name for a syndicate. "The Hardware Syndicate" is not.
An AngelList partner will annually generate and issue K1s wherever necessary. Backers will get a cover sheet consolidating the information on the statements if they invest in multiple deals.
No, leads directly invest in the company and the syndicate fund manager follows the decisions that the lead makes with respect to their own investment.
The next time your lead syndicates a deal, backers will be notified and given the opportunity to opt out of converting their backing into a reservation. The syndicate lead will also provide their investment rationale for the deal and disclose conflicts of interest. Later, backers will go through a closing process and wire funds.
Backers agree to invest in their lead's syndicated deals, on the same terms as the lead. They also pay the lead a carry.
Backers can stop backing a syndicate at any time—of course, all of the backer's existing investments in the lead's deals remain intact when they stop backing.
Backers can also opt out of specific deals. Backers that consistently opt out of a syndicate's deals may be removed by the lead.
When an exit opportunity arises, the lead will advise the fund when to sell the syndicates' shares. If there are any profits, they are then distributed to the syndicate.
For example, if the company IPOs, the lead will decide when to sell the shares. If the company is sold for cash, the lead will distribute any profits to the syndicate. There are many other situations that are not considered here—in any case, the lead advises the fund when to sell.
The syndicate fund, like all investors, is bound by restrictions with the company and can only sell shares in certain situations.
Transparency allows syndicate leads to indicate whether they are syndicating all of their investments (of $100K or more). Leads are not required to syndicate all of their investments and their transparency is not a legally-binding agreement. They may also change their transparency setting at any point in time.
Syndicates that are not sharing all of their investments may suffer from adverse selection, i.e. leads may keep their best investments for themselves.
You co-invest only when a lead syndicates a deal—some leads don't syndicate all of their investments.
You can also opt out of individual deals. Most leads share in their syndicate profile if they expect backers to participate in every deal or not.
Overall, the information that backers receive will not be as detailed as direct investors. On the other hand, most companies will not accept small direct investments. If a backer is interested in making a direct investment, she should get an introduction to the startup.
An AngelList entity or the lead will distribute the following documents to backers when they invest in a syndicated deal:
- Documents related to the fund's formation such as its operating agreement, PPM and subscription agreement
- General terms of the investment, but only if the company permits. At times, templates of deal documents signed by the fund are also made available to backers.
- Qualitative updates on the company status, if available. This is high-level information similar to what VCs provide to their LPs. For example, it may include information about the company's status with customers or financing. It will generally not include any figures.
- Any information investors need for their taxes (like K-1s) is distributed annually
Backers can increase or reduce their investment in a particular deal or opt out of a deal entirely.
The lead may also reduce a backer's investment in a particular deal if the syndicate's allocation is oversubscribed.
Backers that consistently lower their investment amounts or frequently opt out of deals may be removed by the syndicate lead.
Reservations are non-binding indications that an investor wants to invest in a company. When one of your leads syndicates a deal, your backing is converted into a reservation in the company.
When there are enough reservations, investors will be invited to close.
Although reservations are non-binding commitments, backers who regularly opt out of deals or do not follow through on their reservations may be removed from syndicates.
Backing a lead and investing in a VC fund are complementary—syndicates are not intended to replace VC funds. However, there are differences:
- Backers get to pick specific portfolio companies to invest in (through the syndicate)
- VC funds often require much higher minimum investment amount
- Backers can stop backing at any time
- Leads typically personally invest more per deal than GPs
You'll become a member of a new LLC formed specifically to invest in a company for each syndicated deal in which you invest. That LLC will invest in either shares of the company or convertible debt.
If the fund purchases shares, unless there is a dividend in a particular year (highly unusual for these types of investments), there is no taxable event and thus no K1.
If the fund purchases convertible debt, there may be a tax consequence for your portion of the interest on the debt until it converts. In that case, you may receive a K1 yearly
Be sure to consult your own tax attorney for advice related to your particular situation.
Under U.S. law, yes. Please check the laws in your country.
Having a Tax Identification Number (TIN) is helpful but not required. Investors outside (or inside) the U.S. should also get good tax advice when investing in startups.
Backers don't sign the company's financing documents. Instead, they sign documents to invest in a fund that is managed by the lead. The fund's sole purpose is to invest in that particular company. The fund then invests in the startup and the lead signs the company's financing documents.
Once a syndicate is done collecting reservations, investors who are accepted into the deal will receive an invitation to sign documents and wire or ACH capital to the fund.
No. The backers invest in a fund which then invests in the startup. Only the fund is listed on the startup's cap table—the individual investors in the fund are not.
The fund is advised by the lead who signs documents and makes decisions for the fund.
The overhead is equivalent to adding a single large investor to the round.
Your company must be a US-based corporation and have a syndicate lead.
Sometimes other entity types can also be syndicated. Contact firstname.lastname@example.org to discuss an exception.
The syndicate will invest on the same terms you have already negotiated with your syndicate lead.
You can communicate with investors in your syndicate once the deal is closed by clicking the "For Investors" tab on your startup profile and posting an update. You can add files, traction information and rich text. Investors in your syndicate will receive a notification when you post here. It's good form to post monthly updates and often useful ask backers (usually prominent angel investors and operators) to help out your company with recruiting or business development leads.
However, you are not required to update your backers; the final decision on what to share and how often to share rests with the founder. You are not required to share sensitive or confidential information with your backers and, if you decide to do so, the backers are under NDA to not forward information that you share with them. We will eject Backers who forward confidential information.
S corporations are not permitted to have corporate entities as shareholders and, thus, the addition of an entity stockholder will immediately and irrevocably change the company to a C-corp. Each AngelList syndicated deal is structured as an LLC. An S-corp will automatically convert to a C-corp the instant that it takes any equity investment from an AngelList syndicate.
AngelList and its products comply with securities regulations, including the No-Action Relief it obtained from the SEC.
If a syndicated company is raising a follow on round, the syndicate might have pro rata rights. In this case, all syndicate investors are notified and can invest their pro rata allocation online. If some investors are not interested in investing their pro rata portion of the new round, other existing investors or AngelList funds can sometimes take up the remaining allocation.
Please note that not all leads that have pro rata rights will exercise them in every deal. Especially if the likelihood to fill a reasonable amount of the pro rata is low, it might not be offered to the syndicate.
If a lead's investment in a pro rata is at least equal to their investment in the initial round, their carry in the pro rata will be the same as the initial round.
If a lead's investment in a pro rata is less than their investment in the initial round, their carry will be reduced by 5%. The syndicate's fund advisor will receive this 5% carry, in addition to it's usual 5% carry.
This additional carry compensates the fund advisor for additional work and risk, since the advisor can no longer rely on the lead's decision when voting the syndicate's shares.
In both cases, if the lead does not provide access to the pro rata and provide relevant information to create the pro rata syndicate, she will not earn any carry at all and the fund advisor will receive a total 10% carry.