Syndicate

What is venture syndication?

Venture syndication is several investors funding the same round together behind one lead. The lead negotiates the price and terms, does the diligence, and takes the board seat or information rights; the others take allocation on those terms. Increasingly the followers come in through one pooled vehicle rather than individually.

What is an investment syndicate?

An investment syndicate is the group itself, and in current usage it usually means a lead with a standing following who is offered deal-by-deal allocation. Each deal is its own vehicle with its own investors, so backing one deal creates no obligation to back the next. That is the structural difference from a fund: a fund is blind-pool capital committed in advance, while a syndicate is a per-deal decision.

The mechanics

The lead negotiates an allocation from the company, larger than it wants to hold alone, then forms a special purpose vehicle to take the excess. AngelList describes the result plainly: once the vehicle has finished raising, it makes a single investment in the startup, sending a single wire to the company, and appears as a single entry on the company's cap table. The investors are investors in the vehicle, not in the company.

That last point is where founders and first-time backers most often talk past each other. A syndicate does not put 60 names on the cap table; it puts one entity there. The 60 names have no direct contractual relationship with the company, no information rights of their own, and no signature required at the next financing.

Investor counts are capped by securities law rather than by preference. AngelList's own guidance states that for vehicles raising $12 million or less the maximum is 250 accredited investors, and for vehicles raising more than $12 million the limit is 100. Those numbers trace to the Investment Company Act, which excludes from registration a fund whose outstanding securities other than short-term paper are beneficially owned by not more than 100 persons, with 250 permitted for a qualifying venture capital fund.

The offering itself is a private placement. A lead relying on Rule 506(b) may not use general solicitation or general advertising to market the deal and may not sell to more than 35 non-accredited investors, which is why deal notices go to an existing list rather than to a public feed, and why the antifraud provisions apply to what the lead writes in the deal memo.

What it costs

Syndicate economics have two layers, and only one of them is published.

The platform layer is disclosed. AngelList charges a one-time setup fee of $8,000 per vehicle plus a flat passthrough of $2,000 for state regulatory costs, also known as blue sky fees, and states that total fees are capped at 10 percent of the raised amount, excluding add-on services. Follow-on vehicles for the same company through the same syndicate are discounted to $5,000 from the typical $8,000. The recommended minimum raise is $80,000, or $50,000 for follow-ons, and the fees are distributed across all investors in the deal, prorated by investment amount. Add-on services are priced separately, including $6,000 for blocker setup and $12,000 for a 3(c)(7) parallel fund.

The lead layer is negotiated per deal. AngelList's platform lets a lead set custom minimums, maximums and carry when sending invitations, and it does not publish a standard syndicate carry rate. Treat any specific number quoted as market as unverified; read the deal's own terms.

The platform also expects the lead to have money in the deal, recommending that leads invest at least 2 percent of the allocation or $10,000, whichever is lower.

Worked example

Platform fees below are AngelList's published figures; the deal figures are hypothetical.

A lead is offered a $3 million allocation in a Series A and wants $1.5 million of it for a syndicate.

Step one, the fees. Setup of $8,000 plus $2,000 of blue sky fees is $10,000. Against a $1.5 million raise that is $10,000 divided by $1,500,000, or 0.67 percent of the vehicle.

Step two, an individual backer's share. Fees are prorated, so a $25,000 commitment carries $25,000 divided by $1,500,000 of the total, which is 1.67 percent, and 1.67 percent of $10,000 is about $167.

Step three, where the fee cap bites. The same $10,000 of fees against a $100,000 raise is exactly 10 percent, which is the cap. Below that size the arithmetic stops working, which is what the $80,000 recommended minimum and the fee-contribution rule are protecting against.

Step four, carry drag on the outcome. Assume the lead charges 20 percent carry on this deal, which is a hypothetical for the example. The vehicle's $1.5 million becomes $7.5 million at exit, a 5.0x gross return. Profit is $7.5 million less $1.5 million, which is $6 million; carry at 20 percent is $1.2 million; investors receive $7.5 million less $1.2 million, which is $6.3 million. Against $1.5 million of capital plus $10,000 of fees, or $1.51 million, that is 4.17x net.

Step five, the count. Sixty backers at an average of $25,000 is $1.5 million, comfortably inside the 250-investor ceiling for a vehicle of this size, and the company still sees one entity on its cap table.

How it shows up in the documents

Four papers matter and they are easy to conflate.

• The vehicle's operating agreement and subscription documents, which set the carry, the fees, the term and the manager's discretion. This is where the lead's economics actually live.
• The deal notice or memo sent to backers, which is offering material subject to the antifraud rules.
• The company's financing documents, signed by the vehicle as one investor of record. Pro rata rights, information rights and any board seat sit with the vehicle, not with its backers.
• The side letter or allocation email from the lead investor to the company, which is where the syndicated portion of the round is actually agreed.

Common mistakes

• Backers assuming they hold shares in the company. They hold an interest in a vehicle that holds the shares, which changes voting, information rights, tax reporting and secondary transfer.
• Ignoring the fee floor on small deals. A $10,000 fixed cost is noise on $1.5 million and fatal on $60,000.
• Paying carry twice without noticing. A fund manager who also runs a syndicate may charge fund-level carry and deal-level carry, and the layered structure needs to be read rather than assumed.
• Treating syndicate access as diligence. The lead's work is not transferable; a backer who invests because the lead did has outsourced the decision and should price that.
• Forgetting follow-ons. A vehicle with no mechanism or appetite for the next round gets diluted, and the discounted follow-on pricing exists precisely because the second vehicle is a separate entity.

Related terms

An SPV is the legal wrapper a modern syndicate runs through, and an angel syndicate is the retail-scale version of the same structure. The lead investor is the party doing the work the rest are paying for. Co-investment is the institutional cousin, where an LP invests alongside a fund directly rather than through a fee-bearing vehicle, and allocation is the scarce thing being distributed in the first place.