Every startup needs initial capital to grow and develop. At the early stages, founders invest their own funds in the startup and find support from the so-called FFF (friends, family and fools). But the amounts of such investments are rather small and often do not cover all the expenses. Accordingly, in order to move forward and accelerate development of the business, founders need to attract more serious investments.
One of the effective sources of funding is syndicated transactions, which have many advantages for both the startup and the investors who are the part of the syndicate.
Syndicate and roles in It: who makes the decisions?
A syndicate is an association of investors (individuals and business angels) who jointly finance projects that align with their interests. Accordingly, syndicated transactions are collective investments in a startup.
A syndicate consists of a lead investor and backers, each of whom performs a different function.
A lead investor is a key person in the syndicate, thanks to whom a syndicated transaction is possible in general. He has extensive investment experience and, as a rule, already has successful portfolio projects (those startups in which he previously invested).
In fact, the lead investor is the “face” of the syndicate. It is the one, who, among other things:
finds and unites investors (backers) in the syndicate, represents the interests of the syndicate;
finds interesting projects for investment, presents them to the syndicate members and negotiates with them on the terms of investment;
negotiates with founders on the terms of the transaction (including the company’s valuation, the size of investors’ shares);
conducts due diligence of the target startup, assessing its potential and possible risks;
undertakes the organization of legal and administrative processes for the transaction, (hiring lawyers to prepare / review transaction documents, collecting funds from syndicate members and transferring them to the startup, closing the transaction, etc.);
supports the startup after the transaction, advising and assisting in business development (incl. can help attract additional investments in the startup);
provides transparency and regular reporting to syndicate members, informing them about the progress of the transaction and the success of the startup.
Backers are the investors who join the syndicate and transaction, trusting the choice of the lead investor. The key functions of backers are:
Provision of investments
Backers usually contribute smaller amounts than a lead investor, but their collective contribution helps to reach the total investment;
Participation in consulting and development of a startup
optionally, if the backers have such a desire;
Offering the syndicate interesting projects for investment
Also optional.
Relations between syndicate members (lead investor, backers) are regulated in syndicate agreement (syndicated investment agreement), which, among other things, fixes the terms of investment in a particular project, the procedure for management and decision-making, the terms of profits distribution (for example, in the case of an exit) and many others matters.
Ways syndicates provide investments
Providing investments in syndicated transactions can be done in two key ways:
through an SPV (special purpose vehicle) – a specially created legal entity that brings together all investors of syndicate. Syndicate members contribute their funds to the SPV, and it, in turn, invests in the startup.
This approach simplifies the management of the startup’s cap table (capitalization table is a register that reflects all the shareholders of the startup and their shares), but requires additional resources for the incorporation and organization of the SPV. So, instead of many records with data about each investor, there will be only one record of the SPV in the cap table.
Directly – when each syndicate investor independently contributes directly to the startup, and, accordingly, is displayed in a separate record of the cap table.
The advantage of syndicated transactions
Syndicated transactions have many benefits for both startups and investors. Let’s take a look at the key ones.
What are the advantages for a startup?
Simplify negotiations
The startup negotiates with the lead investor, who takes over negotiations with the rest of the syndicate members. This allows the startup to focus on the business rather than the lengthy and often complicated communication with each investor.
More investment in less time
With a syndicate, a startup can raise a significant amount of money in a one transaction, instead of having to look for many individual investors.
Access to expertise and networking
Syndicate investors have experience in investments, business development, as well as industry connections. Accordingly, a syndicate can provide a startup with guidance, strategic support, and even help finding customers /partners / talents.
Reputational support
The presence of a reputable and well-known lead investor in a startup, especially one with successful projects in the portfolio, increases trust from potential customers, partners, and other investors.
And what do syndicate investors get in return?
Access to transactions
Lead investors tend to have good connections and experience, which allows them to find promising startups that backers might not reach.
Sharing risks and minimizing investments
Syndicate members share the risks of investing among themselves, which reduces the financial burden on each investor and makes participation in riskier, but potentially profitable projects more attractive. In addition, the syndicate allows investors with small capital to participate in large transactions by contributing a portion of the total funding.
Investment experience
Backers get the opportunity to learn from the experience of the lead investor and other syndicate members, which, among other things, will help them avoid mistakes and improve their investment strategies.
Saving resources
The lead investor takes care of the due diligence and organization of the transaction, freeing backers from the need to do it themselves.
Syndicated transactions are a collective financing format that makes investments more accessible and efficient for all participants. Thus, startups receive money, expert support and access to useful contacts, and investors get the opportunity to participate in promising projects with risk sharing.
Authors: Nastassia Akulich, Alexandra Kovalyova
Contact our lawyer for more details
Attention Journalists: Use of REVERA website materials in publications is only allowed with our written permission. To coordinate materials, please get in touch with us at: i.antonova@revera.legal, Telegram: https://t.me/PR_revera
