Syndicates are a new way of investments in witch several investors join the investment plan of a lead investor who takes the decisions and in some cases the administration of the syndicate, charging a carried interest of the deal if it turns out well.
It is a mode of investment used in the United States for the past 2 years commonly to provide seed funding to Startups and offers the following advantages to the parties involved:
For the Investors: They get the possibility of taking risky positions, taking advantage on the experience of the lead investor who knows about choosing and managing the investments, allowing them to invest low amounts in a diversified manner.
For the Lead Investor: This system offers him the possibility of invest a lot more than what he usually invest, making him possible to reach better prospects and allowing to get bigger shareholding and voting rights in the funded company. Above all, the Lead Investor gets the carried interest, “carry”, when the deal turns out profitable, usually going from 0% to 25% of the total investment made by the investors.
For the Startups: They may achieve a bigger amount of funding with fewer meetings, because they will only be dealing with the Lead Investor. There will be less space to atomize the participation, as they will receive the funds from several investors though only one special purpose vehicle, getting advantage anyway from the networks of the investors of the Syndicate.
One possible configuration of the investment syndicate is to create a special investment vehicle with the contributions of the investors that will be the one directly investing in the company. The lead investor doesn’t necessarily must be contributing to the special vehicle, but if this is the case it is advisable to generate a shareholders agreement between the lead investor and the special vehicle so they act and vote in the same way over the management issues of the company.
The carried interest in this kind of investment generally will operate separately for each deal or investment round. This allows the investors to decide if they will participate or don’t for each particular deal. Although some syndicates may impose their members the obligation to invest in every deal where the lead investor participate. This type of carried interest is commonly known as “deal carry”, opposing the carried interest charge by a Venture Capital fund, which is commonly known as “fund carry” or “net carry”.
Santiago Henríquez C. Lawyer.
Picture: Vladimir Kudinov (CC0)