A syndicate allows investors to participate in a lead investor's deals. In exchange, investors pay the lead carry.
Here's an example: Sara, a notable angel investor, decides to lead a syndicate. The syndicate investors agree to invest $200K total in each of her future deals and pay her 15% carry.
When Sara makes her next investment, she offers to invest $250K in the company. She personally invests $50K and offers the remaining $200K to her syndicate.
If the investment is successful, the syndicate investors first receive their $200K, after which every dollar of the syndicate’s profit is split 80% to the syndicate investors, 15% to Sara and 5% to AngelList Advisors. AngelList Advisors is a venture capital exempt reporting advisor with the Securities and Exchange Commission, and a subsidiary of AngelList.
Investors get access to deals, leads get carry and startups get more capital with fewer meetings.
Startups don’t pay for syndicate investments. Investors usually pay 0-25% deal carry to the syndicate lead, and 5% deal carry to the fund's investment advisor.
Investors also pay the out-of-pocket costs for each deal—currently $8K in the US and £8,300 in the UK. These costs are paid to third parties such as state regulatory agencies, payment processors and accountants.
The lead and the fund's investment advisor do not receive carry until the syndicate investors’ investments and out-of-pocket costs are returned.
Syndicate investors don't invest directly in a company. They invest in a special purpose fund that is created specifically to invest in the company. The fund is formed as a series LP.
The fund's general partner is Fund GP and it is advised by AngelList Advisors (unless otherwise indicated). The fund's administrator is Belltower Fund Group. The lead also serves as a contractor of AngelList Advisors.
The lead usually does not invest through the fund but is required to disclose to the fund’s investment adviser how she votes, or if she buys or sells shares.
If there is a lead, the fund will usually vote with the lead unless she has a conflict of interest or there are other unusual circumstances.
Carry is a share of the profit of an investment that is paid to the managers of the investment. It is short for ‘carried interest’.
In a VC fund, the limited partners of the fund pay carry to the general partners if the entire fund is profitable. This is called fund carry or net carry.
In syndicates, investors pay carry to the lead for any profitable investment. This is called deal carry. Syndicates use deal carry so investors can opt out of any investment or stop investing at any time.
Syndicates receive pro rata rights if the lead negotiates them with the startup. If a syndicate has pro rata rights, syndicate investors in the initial round may have the opportunity to invest their pro rata allocation in subsequent financings, but pro rata rights typically are not guaranteed to syndicate investors. Any remaining allocation may be offered to other investors or funds. The pro rata may not be offered to syndicate investors if the lead does not participate, if it is unlikely that a reasonable amount of the pro rata will be filled, or for other reasons. Pro rata rights vary in strength and enforceability. Pro rata rights may be waivable by a majority of investors in the round or waived as a condition to a new financing round.
The fundraising information of a syndicate deal is only visible to accredited investors who were invited to the deal. The syndicate lead can choose who she or he invites.
In addition, the company may limit the information visible to investors, and exclude certain investors from seeing the deal (e.g. all investors who indicate having invested in a competitor).
Yes, but only if they are invited by the syndicate lead. The syndicate lead can invite investors who are not yet backers of her or his syndicate.
There are five institutional funds that primarily invest in syndicates.
These funds have access to more information from companies, syndicate leads, AngelList employees and AngelList affiliates than other investors in a syndicate. They also have access to a broader set of deals than is available to other backers on the AngelList platform, may be able to view deals before other backers, and have certain other preferential deal access and allocation rights.
Yes. Individuals and VC funds can both form syndicates.
If your fund has LPs, you should confirm that your LP agreement allows you to form a syndicate.
Any carry from a syndicate deal can be distributed to your fund’s GPs, LPs or split between them.
There are no requirements to simply start a syndicate. Your commitments begin when you syndicate your first deal. You must typically:
Leads are not required to syndicate every investment they make.
Any accredited investor can apply to invest in your syndicate. You can then accept or reject the application. You can also remove investors at any time. You should only accept into your syndicate investors whom you trust and want to work with.
The minimum investment for a lead who is investing her own money is generally 2.5% of the amount that the syndicate raises from individual investors. The minimum investment for a lead who is investing out of a fund raised from limited partners may differ.
This minimum only applies to capital raised from individuals. Syndicates can raise an unlimited amount of capital from institutional investors such as platform funds.
For example, if a lead puts $5K of her own money in a startup, she can raise an additional $195K from individual investors in her syndicate. She can also raise an unlimited amount of capital from a platform fund like CSC Upshot.
The minimum investment may be reduced if a notable investor is making a significant investment in the round. It may also be reduced in pro ratas and other special situations. Investors in the syndicate will be notified if the minimum is reduced.
Investors can also view the lead's investment amount in any deal and opt out of the deal, for any reason.
Learn more about the economics of syndicates.
The lead's carry in a pro rata is the same as the initial round, as long as her investment is greater than or equal to either her pro rata allocation or her investment in the initial round, whichever is smaller.
The lead's carry in a pro rata will be reduced by 5% if her investment is less than either her pro rata allocation or her investment in the initial round, whichever is smaller. AngelList Advisors, the fund's investment adviser (unless otherwise indicated), will receive this additional carry in addition to its usual 5% carry. This is due to the added work and risk, and since AngelList Advisors is less able to look to the lead’s decision when advising the fund.
In both cases, if the lead does not provide access to the pro rata and provide relevant information, she will not earn any carry and AngelList will receive a total of 10% carry.
By default your deals are not public and must be compliant with 506(b) of Regulation D. These deals may not be marketed publicly.
You may market syndicated deals subject to section 506(c), commonly referred to as general solicitation. You must notify AngelList prior to launching your syndicate if you are operating under 506(c) so that AngelList can comply with all relevant regulation.
You are committing to invest in the syndicate’s deals, on the same terms as the lead. You also agree to pay the lead and AngelList carry on those deals as well as the out-of-pocket costs of each deal.
This is not a legally-binding agreement and you can opt out of any agreement or stop investing at any time. All of your existing investments remain intact if you stop investing.
When the next deal is syndicated, the syndicate lead may notify and give you the opportunity to invest. The lead will also provide her investment rationale and disclose conflicts of interest.
No. You can opt out of any deal. Many leads indicate whether they expect investors to participate in every deal.
Investors can increase or decrease their investment in a particular deal. Any change is subject to approval by AngelList. In limited circumstances, investors can also cancel their investment.
The lead may also reduce an investor’s investment in a deal, particularly if it is oversubscribed.
Investors that regularly lower their investment amounts or frequently opt out of deals may be removed by the lead.
Syndicates are intended to complement, not replace VC funds. Differences include:
Raising the minimum investment would cause some leads to stop syndicating their investments. Instead, they would start or join venture capital funds, which typically have no minimums.
The partners of a VC fund typically provide 1-5% of the fund's capital, but also take out 15-25% in management fees. In effect, they don't make a contribution to the fund.
The minimum for leads investing their own money in a syndicate is generally 2.5%. The minimum for leads investing out of a fund may be higher. Except in rare cases, leads receive no management fees from the syndicate.
So, for the vast majority of leads, syndicates are already more expensive than venture capital funds. Raising the minimum would cause some leads to stop syndicating their investments. They would instead invest through a venture capital fund.
Raising the minimum would also cause some leads who are new to investing to stop altogether, because it is already a significant portion of their net worth. This would lead to less diversity of investment opportunities from new leads.
Learn more about the economics of syndicates.
You sign documents to invest in a special-purpose fund that invests in the company. This signature is provided by simply checking a box. You do not sign the company’s financing documents. The company's financing documents are signed by Belltower Fund Group or their affiliates on behalf of the special-purpose fund.
Under U.S. law, yes. You should also check the laws in your country.
A Tax Identification Number (TIN) is helpful but not required.
Investors inside and outside the U.S. should get tax advice when investing in startups.
Restrictions may apply to investors in some countries.
For each syndicate deal, investors become members of a special-purpose fund formed to make the investment. That fund will purchase preferred shares, convertible debt or other instruments issued by the company. Certain taxable events may result in income or losses flowing through the special-purpose fund to its investors. Investors with taxable income or loss will receive K-1s.
If the fund holds an equity interest in a portfolio company that is a US Corporation, there is generally a taxable event on exits or when the company shuts down. In rare instances, there may also be a taxable event if the fund receives a dividend or distribution.
If the fund purchases convertible debt, prior to conversion into equity there may be taxable income for your portion of the interest on the debt or in connection with the cancellation of debt such as in a bankruptcy. Non-US investors should consult local tax advisors to understand the local tax impacts of their investment. Be sure to consult your tax advisor to understand the impacts of your investment in the context of your personal tax situation.
For each investment in an AngelList syndicate deal, investors become members in a Delaware series LP. Each syndicate will send out the U.S. tax form K-1 to all its members, both foreign and domestic, in any year in which it has taxable income or deductible expenses.
This should not be construed as tax advice and you should consult your own tax advisors: that said, typical distributions for exit events from AngelList syndicated deals to non-US investors who don't meet US presence tests are not subject US tax and withholding requirements, provided that such investors have submitted the appropriate withholding forms.
There are important exceptions to the generalization stated above (including certain withholding requirements for non-exempt foreign entities under FATCA and relatively uncommon types of distributions to all types of foreign investors for interest, dividends and distributions that are effectively connected with a U.S. trade or business ), so please be sure to consult your tax advisor before making an investment.
Syndicate investors don't invest directly in a company. They invest in a special-purpose fund that is created specifically for each investment. This fund then invests in the company. The corporate form of the fund is a series of a Master Partnership. The General Partner of the fund is Fund GP (an affiliate of AngelList) and the fund is advised by AngelList Advisors (unless otherwise indicated), a subsidiary of AngelList and an exempt reporting advisor. The lead serves as a contractor of AngelList Advisors, providing certain information related to the investment. AngelList Advisors and the lead each receive carry from the special-purpose fund.
A management fee is a quarterly or annual fee added onto a deal, meant to compensate the lead for their time and expenses. Leads may charge management fees for hiring employees, maintaining an office, paying salaries, etc. This is similar to how venture capital firms operate. However, in the case of an AngelList syndicate that charges management fees, all economics (including management fees) are calculated on a deal-by-deal basis because investors can opt in or out on each deal.
This is a new feature AngelList is exploring. To start, only leads who incur substantial costs running their AngelList syndicates will charge management fees. AngelList will determine if other leads qualify for management fees in the future.
For each deal, the lifetime total management fee (ex. 3%) is collected upfront and drawn down by the lead over time (ex. 0.25% quarterly, for three years). If there's an exit before the entire management fee is drawn, undrawn capital is returned to investors. If there's a profitable exit, the lead must return the entire amount raised (including the management fee) before earning any carried interest.
Management fees allow leads to hire staff, maintain offices, and be competitive with venture capital firms that have fees at their disposal. Many of the world's top investors are VC General Partners. By introducing management fees, AngelList is better equipped to support this cohort of investors and attract them to share their deals online.Over time, many of the current syndicate leads will face financial pressure to start or join venture capital firms where they can earn fees to offset their costs. They may choose this instead of syndicating. Management fees help mitigate this financial pressure and retain leads on the AngelList platform.
Management fees are displayed on the deal page alongside the setup costs that you pay on each deal. There is clear disclosure on deals with management fees. No additional work is required from you to participate in these deals.As always, you should review deal terms before participating and opt out on deals where you don’t like the terms. There are dozens of leads on AngelList with quality deal flow and no management fees.
First, you must have a syndicate lead.
You must also be a U.S. C corporation or LLC (only if the LLC is issuing debt in the financing). U.K. corporations also qualify.
The syndicate will generally invest on the same terms as the syndicate lead.
No. A syndicate only adds two investors to the company's cap table and syndicate investors should not be counted toward the SEC’s limit of 2000 “shareholders of record” that private companies must observe. Syndicates cannot be used for the purpose of bypassing this 2000 shareholder limit though.
If you are provided with access to a syndicate deal, review information provided by the company and the deal lead carefully. AngelList and its affiliates as well as their agents take no responsibility for and do not endorse any information concerning companies or deal terms. Should you decide to invest after performing your own diligence (including reviewing the relevant private placement memorandum, subscription agreement, and operating agreement), you will provide various information in the subscription process and execute a copy of the subscription and operating agreements online.
What is a PFIC/CFC?
The Passive Foreign Investment Company (PFIC) and Controlled Foreign Corporation (CFC) rules are US tax rules that are designed to prevent US investors from avoiding or deferring taxes by structuring investments through foreign companies.
When US investors invest in foreign companies, they have to comply with PFIC/CFC tax rules or face severe tax consequences.
Is my Company a PFIC or a CFC?
If your company is incorporated in the US, the answer is no.
If you are a startup incorporated in a non-US country, the answer is still usually no:
If you're unsure, consult with your tax advisors to make a determination for your particular case. Most competent tax advisors should be able to quickly tell you if these rules may be implicated.
Why do I need to sign a side letter?
US investors need to document a CFC/PFIC agreement in order to satisfy U.S. tax compliance obligations. If there isn't already a CFC/PFIC agreement in place, AngelList funds generally require a side letter.
What do I have to do if I sign the side letter?
The form AngelList side letter has you agree that if you become a CFC or PFIC you will notify the AngelList fund and provide information that allows AngelList funds to comply with the tax regimes.
You also agree to provide AngelList funds with confirmation that you’re not a PFIC/CFC in the case of a tax audit or company exit. This is so that you don’t have to to make PFIC/CFC reports every year (which is more onerous and commonly required by US funds investing in foreign companies).
You can reduce or waive your carry on an investor-by-investor basis.
AngelList will reduce its standard 5% carry for investors you bring to the platform as long as the average carry to AngelList is at least 2.5%. Here are some examples:
→ the average carry to AngelList on this deal is 2.5%.
→ the average carry to AngelList on this deal is 2.5%.
→ the average carry to AngelList on this deal is 2.5%.
At the time of investing into the syndicate, investors will always see the maximum total carry they might need to pay. The split between you and AngelList is not visible to investors and will be handled once the syndicate has finished raising.