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Most angel and venture capital deals are syndicated, meaning that two or more investors come into a deal under the same terms at roughly the same time.
But new entrepreneurs, and even new angel investors, are often either unaware of the prevalence and importance of syndication or they don’t understand how it actually works. Since pooling funds is critical to funding success, this comes as a bit of a surprise. RVC is committed to helping investors pool funds together so that startups can quickly finish fundraising and get back to growing their businesses.
Cat herding is another term for syndication. You have to coordinate lots of people at the same time and on the same terms. I’ve put together a list of the top five things I wish angels and founders knew about syndication.
(Lack of) Speed Kills Deals. Syndicated deals need to move quickly to get done. Startups that are not prepared with terms they can live with, a solid due diligence data room, financial projections, and a network of investor contacts will often find that they have to pause their fundraise to produce necessary documents for investors. Better to have the data room ready to go from the start. Investors are like cats: they will chase the latest shiny thing. If they haven’t seen a deal close for three months, they may forget about it entirely, even if they were “soft circled” at the beginning. Investors won’t wait around forever for a deal to close.
You Need a Lead Investor. A syndicated deal needs a lead investor to guide the process. The role of the lead is to negotiate the term sheet with the founders, form an SPV or fund, and conduct due diligence, which they are hopefully willing to share with other syndicate members. Many companies have investors who have expressed interest, but who don’t want to lead the deal or do the work of pricing the round. The lead breaks this logjam by putting together a package that investors can easily join. The lead often helps the founders bring in syndicate partners as well, ideally because they are known and trusted and are willing to share their conviction for the deal and explain why they are backing it.
Deal Terms Matter. I’ve seen missteps on both sides of the table here. Some investors say, “valuation is easy — just offer half of what the founder is asking,” while some founders price their pre-revenue, pre-product company at $20 million, where even half is still too much! Ideally, reasonable terms are negotiated once with the lead investor, and other investors can follow along on the same terms. There is some mythology in the angel world that “valuation doesn’t matter,” but nothing could be farther from the truth. Raising money by selling common stock is another non-starter for smart investors. Uncapped convertible notes or SAFEs are pure investor suicide. It’s best for investors and founders to research market norms, if they’re not already familiar, and try to keep the deal looking like the competitive deals investors are already seeing. Remember: “the best flavor for a term sheet is vanilla.” Exotic terms are rarely an attractive strategy. RVC has a template term sheet we’re happy to share if you don’t have one!
Cap Table Hygiene Matters. Startups sometimes love the idea of many angel investors until they realize they may end up with a messy cap table, dozens of signatures, scattered communications, and a painful Series A diligence process. Syndication can happen directly, through individual checks into the company, or through an SPV or fund. Each has tradeoffs. Founders should think about how today’s round will look to tomorrow’s institutional investor. Hint: they hate seeing dozens of angels on the cap table. Herding the cats for necessary shareholder votes can be a nightmare if investors are not investing through an SPV or fund. Angels should understand whether they are investing directly into the company or into a vehicle that invests into the company.
There’s more, but keeping these points in mind will help deals come together more quickly and effectively, including a happier transition into your next round one or two years down the road.
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