Seed Founders, Beware The Syndicate Shenanigans
As any reader of this blog would know, I am a huge AngelList fan. I have run a few Syndicates now over the past two years. Most of them have cleared, but a few haven’t. I could’ve run a lot more, but I intentionally elected to be very careful about how and when I bring syndicate opportunities to the platform (1) because I’m simply new to investing overall, and I didn’t want to bring people into the fold with me too early; and (2) because I needed to learn AngelList’s platform myself, over time, and learn in between each syndicate to get better.
When I present the AngelList option to a founder, I always educate them first on all of their options for their fundraise. I like to lay out the options and let the CEO decide. Many times, the CEO has elected to forego the AngelList option, citing either privacy concerns, or signaling concerns, or wanting to wait; at other times, they dive right in, want to learn the process, and have so far been very happy.
Lately however, and why I’m writing this post, I’m encountering investors in the angel and seed stages who are up to some tricks, what I like to call “The Syndicate Shenanigans.” The classic move goes something like this, with the investor offering to the founder: “I would like to invest X, but conditional upon me taking this to AngelList and putting it in my Syndicate for 4-6x.” The founder in this case is faced with a dilemma, and this post is targeted both at the founder and also those who participate and follow Syndicates on AngelList. To be clear, these can work well if done right, but it’s smart to understand the risks before jumping into the fray:
To Those Who Follow Syndicates: First, determine if you want to automatically follow any deal of a Syndicate leader, or whether you want to pick deal by deal. If you blindly follow, your money gets priority, so just know you’re along for the ride; if you go deal-by-deal, try to understand why the Syndicate lead or founder wasn’t able to fill up the round privately. Second, generally speaking, you may want to monitor the deal pace at which the Syndicate lead is bringing opportunities to the platform.
To Founders Offered Such Terms: This may put you in a tough spot. You want the money, but the conditions attached to it could be confusing. Sometimes investors will say they have a “minimum check size” to make the math work in their own fund model, so when an investor offers to commit with the condition of bolting on a Syndicate, this is another flavor of the line: “We have a minimum check.” In this case, they likely have an economic arrangement on AngelList that gives them a percentage of carried interest on top of the money they collect for you. You have some options here. First, learn about AngelList and Syndicates, and make sure you know whether the particular Syndicate offered to you would be private or public; understand the process and how long it could take (2-4 weeks to clear); and understand how the Syndicate lead (who will be named on your cap table directly) will market your company to those other investors that you’ll never meet.
I want to be clear that (1) I love AngelList and (2) have done this myself, but (3) that making AngelList a condition of an early-stage check isn’t bad behavior, but should be done so in a way that educates the founder about his or her option, and less about throwing down a conditional on the team. Happy to answer any questions you may have and/or refer you to CEOs I’ve worked with who’ve gone through the platform for a Syndicate.