You’re facing an angel investor’s dilemma. You’ve looked at proposal after proposal from early stage startups and finally, you found one. You feel it in your gut; after spending countless hours reviewing the deal, you believe that this company is on solid ground, and you want in. So where’s the dilemma? This startup needs more capital than one angel (that would be you) can or will invest in a single deal. End of story? Absolutely not.
It’s not uncommon for a group of angel investors to form a syndicate, or for a single angel to join a syndicate, with the purpose of loaning a relatively large sum to a single startup company. (For those of you who are hooked on film noir, who own copies of Chicago Syndicate and The Big Heat, and who consequently believe that the word “syndicate” spells trouble – it’s time to move on.) In the world of finance, there is nothing underhanded or shady about syndicated investing.
It’s a simple concept: a syndicate is an alliance that brings together a large collection of angel investors to invest in a particular startup; they share the risk, and they’ll eventually share in returns from their investment. In most cases, one angel group will take the lead in deciding whether to form an investing syndicate; the group’s leadership will decide who they want to invite to join the syndicate and they’ll coordinate the syndicate’s activities.
Some angel investors say they no longer approach their investments from an individual perspective; instead, they make business deals in association with an angel organization of some sort. Their reasoning is pretty solid. The collective wisdom of the group is focused on screening every startup for potential. Each member of the group brings a distinct set of skills and experiences that will add to the overall strength of the group. And for new angels, working with an angel group is the perfect classroom to learn the ropes.
Angel groups can be formally organized (you call your lawyers and they draw up the paperwork to form an LLC or some other legal entity) or they can be a more informal, member-managed group (you’re probably still going to want to consult with legal counsel). And at some point, an angel group may make the decision to join with another group to take advantage of a particular investment opportunity.
Before you become a syndicated investor, you probably will want to work with a legal expert who specializes in financial services who can put together the details of the syndicate. Then, of course, you must make yourself entirely familiar with the terms of the agreement to ensure that your investment offers many of the same rights and privileges as an individual angel. Along the way, you may find value in the words of poet Alexander Pope, who tells us, “There is a certain majesty in simplicity . . .” (A brief interpretation for those lacking in poetic spirit: keep it simple.)
* For series, references are published in the last installment of the series.
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