Accessing Venture Capital Deals through Syndicates
What is a syndicate?
A syndicate is a group of investors who come together to invest in a specific company.
What is an “accredited investor”?
Generally, the SEC defines an “accredited investor” as someone who has earned more than $200,000 annually for the past two years or more than $300,000 combined with their spouse or alternatively people who had an individual or combined net worth of more than $1 million, excluding the value of their home.
The SEC has recently announced rules to expand the definition to new types of investors. You can read the press release here.
What is “carry”?
Carry is short for “carried interest”. It represents that amount of the profit that is retained by the syndicate lead. For example, if the carry is 20%, the syndicate lead keeps 20% of any money earned by the syndicate after the initial investment is paid back. If syndicate member’s investment is not profitable, the lead earns no carry.
What is an “LP”?
“LP” stands for Limited Partner. An LP is an investor in a fund, syndicate, or company. They are a financial backer that general does not get involved with day-to-day operations.
What is a Special Purpose Vehicle (SPV)?
A Special Purpose Vehicle is the legal entity that is created for the purpose making the syndicate’s investment in a company. When a syndicate is formed and makes an investment in a company, a Special Purpose Vehicle is created and the syndicate members make an investment in the SPV which then invests in the target company. Syndicate members are not direct investors in the target company. The SPV which is managed by the syndicate lead is the investor in the target company.
What does Pro-Rata mean?
Pro-rata refers to the right but not obligation to participate in a future financing round in order maintain your percentage ownership in the company. Syndicate usually try to negotiate pro-rata rights so they don’t get diluted in future rounds.