In our previous article, we considered Syndicate Investment or Financing from the perspective of investors. You may read the article HERE. In this article, we will consider how Startups can raise funds through Syndicate Financing.
A syndicate investment is an investment vehicle made up of a group of individual or institutional investors in which a lead investor (also known as a Syndicate lead), sources for investments, conducts due diligence, and secures allocation for other investors referred to as “backers”.
As explained in our previous article, the syndicate investment model is carried out in such a way that a special purpose vehicle (SPV) is set up. An SPV within this context is a company incorporated specifically for the purpose of carrying out an investment transaction.
WHAT ARE THE ADVANTAGES OF A SYNDICATE INVESTMENT STRUCTURE FOR A STARTUP?
Some of the advantages of Syndicate investments as it concerns startups are as follows;
1. The investment process is simpler and requires less legal work: Since all investments by investors are carried out under a single vehicle, founders raising funds through this means do not have to deal with the rigorous legal paperwork associated with dealing with multiple investors.
2. With multiple investors involved, it is possible for a startup to raise huge capital amounts. As against what could be obtainable if a single investor was investing.
3. Startups are protected from the complexities associated with dealing with many investors as well as reflecting each transaction in their cap table, etc.
4. The syndicate investment model saves time in the sense that founders can conclude the said transaction as fast as possible as they only have to deal with the syndicate lead, who carries out the due diligence and paperwork on behalf of its backers.
LEGAL FACTORS STARTUPS MUST CONSIDER WHEN RAISING FUNDS THROUGH THE SYNDICATE INVESTMENT STRUCTURE
In no particular order, below are some legal considerations startups and their founders must take note of when raising funds through syndicates;
1. Startups must ensure their house is in order. By keeping a house in order, we’re referring to; the fact that the company has the proper legal structure for receiving investments, financials are in order, tax compliance is satisfactory, as well as other compliance-related matters.
2. Ensure that the negotiation terms are in alignment with what is generally obtainable within the space as well as in alignment with the goal of the company. You will need legal and financial experts at this stage, it is, therefore, advisable to get one as soon as possible.
3. Founders must conduct due diligence on the investors, particularly the lead investors. Have they carried out similar transactions in the past? If yes, how did it go? Do their values align with yours and that of the company? What relevant expertise do they have that will be of value to your company? Whatever are your findings, you want to ensure that your prospective investors have a good reputation within the startup ecosystem.
4. Finally, founders should pay attention to the percentage of equity they will be issuing to investors as well as the amount that will be invested into the business.
Raising funds could be a tasking process for a founder, as such a company must ensure that all preliminary requirements are satisfied to qualify for funding from investors. To protect your interest throughout the entire process, we strongly recommend that founders retain the services of a business lawyer or law firm with a good knowledge of startup funding transactions.
Do you need help with negotiating a funding transaction for your startup? Or you’ll like to know more about raising funds for your startup through syndicate investment? Feel free to reach out to us through the Whatsapp icon on the lower right part of this page or HERE, and we will be delighted to attend to you.