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 accepting online investments.
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.
Backers pay 5-20% carry, per deal, to the syndicate lead, and 5% to AngelList.
Startups pay nothing as long as the syndicate fund closes above $150,000. Otherwise, either the lead or the company pays a one-time fee that covers the legal and administrative costs of closing the fund and managing it for its lifetime.
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).
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 a percentage of the profit of a fund, if any.
In syndicates, a special purpose fund is created for each syndicated deal. If that deal returns a profit to the backers, the lead receives a carry.
This is different from venture capital funds which make several investments out of a single fund. In a VC fund, the profitable investments must compensate for the unprofitable ones for the general partners to receive a carry. The GPs may also have to return a minimum profit to their limited partners for the GPs receive carry—this is known as a hurdle rate.
Since syndicate leads don't have to compensate for their unprofitable investments or return a minimum profit to receive carry, they can charge a lower carry than traditional VC funds.
Due to securities regulations, only 99 accredited investors can invest in an Invest Online campaign or a syndicated deal.
Qualified purchasers do not count towards this limit. Qualified purchasers include (1) individuals with over $5M in net assets and (2) trusts or companies with over $25M in net assets. (Technically, qualified purchasers invest in a different fund from the other accredited investors.)
For example, a single Invest Online campaign can accept an infinite number of qualified purchasers and 99 non-qualified—but accredited—investors 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.
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. The minimum deal size (your allocation in the round) is $200K.
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 advisor of our fund manager, Assure Fund Management, and register as an exempt reporting advisor with FINRA.
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.
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.
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.
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.
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.
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.
You co-invest only when a lead syndicates a deal—some leads don't syndicate all of their investments.
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
- Terms of the investment as well as templates of the documents that the fund signs, such as the underlying investment documents (not including the company's schedule of investors)
- Qualitative updates on the company status, if available. This is very high-level information that is 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
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.
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.
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 a particular investor instead of an entire fund
- Backers do not have a 10-year lockup on their funds
- Backers can stop backing at any time
- Leads typically personally invest more per deal than GPs
For each syndicated deal you invest in, you'll become a member of a new LLC formed specifically to invest in that company. 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 usually no taxable event. K1's are distributed only when there is activity in the fund, so you may receive no K1's most years.
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.
Yes. 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.
Your company must be a US-based C Corporation (preferably Delaware, California, or NY) and have a syndicate lead.
No. The lead and 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.
Probably. The lead and backers invest in a fund which then invests in the startup. The fund only adds one new investor to the cap table. But the fund will likely be interpreted as a pass-through entity for the purposes of counting shareholders.
Fortunately, the JOBS Act just lifted the shareholder limit for a company to stay private from 499 to 1,999.
AngelList has obtained No-Action Relief from the SEC, meaning that the SEC will not take enforcement action against users of syndicates.
Assure Fund Management LLC is the manager of the special purpose LLC that is created for each syndicated deal or Invest Online campaign. They are a back-office provider for many venture funds.
For compliance, product and economic reasons, syndicate leads do not manage the LLC for each syndicated deal, but advise Assure which, in turn, manages the LLC.