Joys and Tribulations of Setting up and Managing Angel Syndicates

By Brigitte Baumann EBAN President Emeritus who is also the Founder of efino and GoBeyond

When I created my first angel group, GoBeyond, in 2008, my aim was to democratize and professionalize angel investing so that more people could not only build portfolios but also reinvest. Syndicates were a critical component in achieving this goal. 12 years and 300+ syndicates later, I am still a great defender of angel syndicates. At the same time, I have come to appreciate their complexity, especially when it comes to regulation, follow-on rounds, changes in deal and angel network leadership, exits, and economics. 

Just so we are all on the same page, an angel syndicate for me is when a group of investors agrees to invest together in a particular project and appear as one on the invested company’s cap table. 

Here are some of the strategies I have adopted that may be useful to you as an initiator and manager of an angel syndicate:   

1. Decide to syndicate or not: 

The first thing I do whenever I am considering forming a syndicate is to ask myself a few questions to determine whether syndication actually makes sense. Questions include:

• Is everyone involved clear on what syndication will mean for them including the costs? 
• Are they aligned and committed for the life of the investment? 
• Is it feasible given where the startup to be invested in is located, the location/nationalities/types of investors, and the source/location of the funds?
• Does the ratio of expected syndication costs to investment amount work?

2.   Create the syndicate:

Once it is decided that a syndicate is desired and viable, there are a couple of important steps:

• The investors need to decide what they want their rights and responsibilities in the syndicate to be. The legal aspect is important here. Many of the syndication platforms provide legal document templates.
• Next, one needs to determine who will do what, who will own what, and who will be liable for what and execute the setup. Generally speaking, there are four roles in a syndicate: the vehicle/platform, the syndicate manager, the investor representative, and the investors (the syndicate members). 

• There are generally 3 types of syndication vehicles/platforms:
  • Agreement between the investors: each is on the cap table and has a “Power of Attorney”  usually given to one of them
  • Trustee/Fiduciary gets instructions from each investor and collectively buys and holds shares on behalf of each investor
  • Legal company structure – often called Special Purpose Vehicles (SPVs) Investors are shareholders of an entity. That entity purchases and holds the shares

All may not be feasible/available for your situation. Each has its pros and cons and has various regulatory aspects to it. There are a number of service providers for each type and some now operate across borders. In most cases, KYC/AML due diligence will be required for each member of the syndicate upfront and on an annual basis. If you choose a solution where you will need to find a bank, be aware that this can be a challenging task especially if you have members in your syndicate from certain countries.

• The syndicate manager is often the Business Angel Network. 
• The investor representative  is one of the investors in the syndicate, usually, the person who has the most knowledge of the investment and may be on its board. 

3.     Manage the syndicate over the life of the investment – ensure flexibility and watch out for cost creepage:

• I find it useful to do the follow-on rounds of an investment using the same syndicate structure as for the first investment. It enables new investors to enter and others if they wish to exit. To facilitate that, it is good to have a “cap table” of the shares listing the shares bought and sold by a person for each round of financing and between rounds.
• The economics of syndicates have a number of components and can be a challenge as there are several parties involved: the members of the syndicate prefer to pay all costs upfront, some at exit if needed, and will look at net returns on the investment; the investor representative will often get paid a carry at exit – the exit may have earn outs over 5 years; the syndicate manager needs to be compensated for the work she does over the life of the investment and compensated if investment takes longer to exit and upfront costs are not enough. This is especially true if performed by an angel network whose economies are often very tight. The syndication vehicle/platform has a set of economics it needs to meet to stay sustainable over the life of the investment. 
• There are a few situations that can arise during the 5-10 year life of a syndicated investment. Some can be a challenge due to clauses in shareholder agreements, regulatory rules, and the complexity of the task. Examples of these are as follows: a change of syndication platform, syndicate manager and/or investor representative, syndicate members deciding they no longer want to be together, and/or an individual wanting to exit the investment. Having a plan on how these will be managed and who will pay for related costs is important to have, ideally while creating the syndicate.

Conclusion

Angel syndicates are critical and offer lots of advantages to angel investors and entrepreneurs alike. They will be even more so in the future. They are also time-consuming, and their governance and economics are complex; they are long-term commitments. Therefore, I strongly suggest that one gets educated (stay abreast of changes) before starting one, work with experienced partners and enjoy the journey of democratizing and professionalizing angel investing.

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