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Funding Guides Published:  Dec 10, 2023 8 min read

Raising from lots of small investors? You can now roll them up into a single entry on your cap table

Anthony Rose
Anthony Rose

With VC investment increasingly difficult to come by, more companies are raising later-stage rounds from angel investors instead of VCs. And more companies are also doing what’s effectively private crowd rounds, using the automation provided by the SeedLegals platform to raise from dozens, sometimes a hundred or more, angel investors who they’ve reached out to directly – that could be their customers, LinkedIn contacts or their wider network.

Some founders, and some later-stage VC investors, are not keen on there being many small investors on the company cap table. We don’t think that’s necessarily an issue, as we explain here. But, rather than arguing whether having many smaller investors on your cap table is a problem or not, we just made it super-easy to avoid the problem altogether – you can now ‘roll up’ dozens of small investors into one entity on your cap table, thanks to our Rollups feature.

In the video and FAQ below we explain what a rollup is, how to enable rollups in your SeedLegals funding round in a few clicks, how it all works, and how much it costs.

If you’re looking for a clean cap table, something that used to be complex, expensive and time consuming to set up is now SeedLegals-simple, it takes just a minute or two to add a rollup to your funding round.

Rollups FAQ

Don’t rollups need a complex SPV or nominee entity to be set up?
Yes, but we made that all SeedLegals-simple. It’s now just a few clicks to enable a rollup in your funding round, you’ll immediately have a SeedLegals-managed nominee included in your round, ready for you to add investors into the rollup. Or move back out again. We took care of all the backend complexity, it’s literally just a few clicks for you.

Are rollups SEIS/EIS compatible?
Yes, our rollup structure is carefully designed to be SEIS/EIS compatible. From the investor’s point of view, there’s no change to their SEIS/EIS compared to investing directly.

Do investors need to agree to be added to a roll-up?
Yes. But it’s not so much that you’re forcing them to do something that they don’t want, it’s more that if they don’t want to be in a rollup, then you have a choice: you can either agree to let them invest directly (i.e. not in the rollup), or tell them, sorry, being in the rollup is a condition for their investment.

What’s important is that investors understand that they are in a rollup at the point of their investment so they aren’t surprised later and are unhappy that they signed documents they didn’t understand. That means our legal documents (notably the Nominee Agreement) and the workflow hint text hopefully makes it clear to the rollup investors that they’re investing via a rollup, and how that affects their rights (particularly voting, see below).

How does voting work for investors in a rollup?
We support two ways to configure voting rights for investors in a rollup:

  1. The rollup has no voting rights – i.e. they get non-voting shares (the same as if you’d given a direct investor non-voting shares)
  2. One person in the rollup is elected or chosen to represent all the rollup investors – that person is known as the proxy

Either way, you have to appoint one person to act as the proxy for all the members of the rollup. If the rollup investors get voting shares, then it will be the job of that person to collect the voting intents of each of the rollup investors, and then the rollup as a whole will vote based on majority vote of the rollup members.

What’s in it for investors to be in a rollup?
Investors might ask about the advantages and disadvantages for their being in a rollup.

In terms of advantages, there are three:

  1. Better anonymity
    When you invest directly in a company and you become a shareholder, your name appears on Companies House when the company files their next Confirmation Statement. By investing through a rollup, on the rollup entity (SeedLegals MPL Nominees) gets shown on Companies House, not the names of the investors in the rollup. It’s possible that keeping their investments private might mean investors ask that you create a rollup just for this purpose.
  2. Easier to sell their shares later
    When you’re a shareholder in a company, the preemption on transfer rights means you need to offer your shares to existing shareholders before you’re able to sell them to whoever it is you wanted to sell them to. This is to protect the other shareholders from someone selling their shares to e.g. a competitor. But in a rollup, you can freely sell your shares to other members of that rollup without any preemption rights applying. This might make for more liquidity later, with frequent trading of shares within a rollup.
  3. A clean cap table may make the company more investible
    Not a direct benefit to the rolled up investor, but some VCs like companies to have a ‘clean cap table’, and so having smaller investors rolled up in a single line entry on the cap table may help with VC investments later, which helps everyone.

As to disadvantages, if the investor is getting voting shares, then being part of a rollup means that the rollup collectively vote as if they were a single shareholder owning the same number of shares as all the investors in the rollup. This means that individual rollup investors have an indirect, rather than a direct vote… which, depending on how the rollup investors collaborate, could be more, or less, powerful than individual voting.

Also, rollup investors will get a certificate of beneficial ownership in SeedLegals MPL Nominees, rather than a share certificate in the company directly… but that doesn’t affect their SEIS/EIS or payout on a sale of the company.

What if an investor doesn’t want to be in a rollup?
By using SeedLegals for your funding round and your rollup, it’s one click to move an investor into a rollup, or out of a rollup (so they go back to being a direct investor in the round). If an investor really doesn’t want to be in a rollup, and you’re happy to have them as a direct investor on the cap table, just click to move them out of the rollup and back to being a direct investor.

Can I roll up SeedFAST investors?
A SeedFAST are done individually, one per investor, so there’s no relevance to rollups at the time you issue a SeedFAST.

However, if your goal is that when the SeedFAST converts the investor will get shares via a rollup rather than shares directly in the company, then the wording in the SeedFAST agreement has to allow for that, otherwise the investor will be surprised to see their investment converting in a rollup rather than their being issued shares directly in the company.

Accordingly, coinciding with the launch of rollups on SeedLegals, we’ve enhanced our SeedFAST agreement so that when you create a SeedFAST, you can select that the SeedFAST (at the option of the company at the time of conversion) can convert in a rollup rather than as a direct investment. The investor could refuse to sign the nominee agreement later so conversion in a rollup later isn’t guaranteed (it can’t be, because the rollup details aren’t known at the time of the creation of the SeedFAST, only at the time of conversion), but it should be unlikely that you won’t be able to convert it in a rollup.

Will the investors in rollup be visible to other shareholders?
The purpose of a rollup is to bundle up a number of, typically, small investors into a single entity which appears on the cap table. So, who can see the details of the rolled-up investors?

  • Other shareholders in the company will see the name of the rollup on the cap table (in the case of SeedLegals rollups, that will be SeedLegals MPL Nominees) but will not be able to see who the members of the rollup are. They will be able to see what share class, voting rights, etc., the rollup has as a whole, just as they can see that for any other shareholder on the cap table, but not the individual members.
  • On Companies House, the investors in the rollup will remain private – i.e. the Confirmation Statement will show just SeedLegals MPL Nominees, not the investors insider that structure. So being in a rollup is a useful method for investors to not appear on Companies House.
  • The founders / admins of the company that’s doing the funding round on SeedLegals will of course be able to see the members of the rollup, because it’s they who added them to the rollup.
  • The investors in the rollup will be able to see the details of all other members of the rollup – that’s so they can vote collectively, sell their shares to other members of the rollup, etc.

When can you add more investors to a rollup?
We can split this question into three scenarios:

  1. I’m in the middle of a funding round, can I add more investors into the rollup?
    The rules here would broadly be the same as had you added or removed direct investors in the round: If the Shareholders Agreement has not been signed yet, then you can freely add or remove rollup investors… noting that if the fundamentals of the round change (e.g. investors get less equity than they were expecting, or less than when they signed the term sheet) then investors are free to pull out. So if you do plan to change the investment amount for the rollup as a whole, you should notify the other investors if it’s a significant change, orIf the Shareholders Agreement has been signed, then any change to the investment amounts may require that everyone’s signature be removed and people asked to sign again, or at least be notified and given the choice of dropping out or agreeing to the change.
  2. I’m in the middle of a funding round, can I replace investors in the rollup?
    Only the name of the rollup (SeedLegals MPL Nominees) and the total number of shares for the rollup appears in the Shareholders Agreement (i.e. not the names of any of the investors in the rollup), the good news is that, so long as the total investment amount for the rollup remains unchanged, you can freely replace investors in the rollup until the point the funding round closes, with no need to notify other shareholders or get them to re-sign any documents.
  3. I created a rollup in my previous funding round, can I re-use it in my upcoming round?
    Each rollup is ‘signed and sealed’ when a funding round closes, so if you want to add further rollup investors in your next round, you’ll need a new rollup for that. The next rollup will be the same SeedLegals MPL Nominees in your cap table, so you won’t have any additional cap table entries, but it will be a new rollup.

Can I roll up existing shareholders, rather than just new investors?
Currently our rollups feature is designed for rolling up new investors who are investing now, as part of a new funding round on SeedLegals.

When it comes to rolling up existing shareholders it’s not that simple, they have shares in your company, you can’t just take those shares away and give them shares beneficially held for them by a nominee entity… at least not without their approval.

  • If you wish to roll up existing shareholders, hit the chat bubble, we’d like to hear from you.

What happens if an investor fails the KYC process?
When investors invest directly in a company it’s up to the company to do whatever level of KYC checks on the investor they deem appropriate. That could be meeting them in person for coffee, asking to see a copy of their passport, looking them up online, etc. – basically enough to satisfy themselves that this person is who they say they are, and that you want them on your cap table.

But when it comes to investing via a rollup, those investors will be going through our SeedLegals MPL Nominees entity, and we have an FCA obligation to do a KYC check on them.

If the investor fails our KYC check then we’ll let the company know – they’ll need to remove that investor from the rollup for the rollup to go ahead.

Who manages the rollup nominee entity?
SeedLegals MPL (a wholly owned subsidiary of SeedLegals), operating as an appointed representative of Kroll Securities Limited, which is authorised and regulated by the FCA.

What happens if SeedLegals goes out of business?
In the unlikely event of SeedLegals stopping supporting rollups or going out of business, the wording built into the rollup and shareholders agreement for the funding round has the rollup investors automatically turning into direct investors. So, nothing is lost, all the investments are preserved, but as direct investors rather than rolled up in the nominee.

I’m sold. How do I add a rollup to my funding round on SeedLegals?
Easy: Start your round, click to add investors. There’s a prompt to add a rollup. You can click that at any time before the parties sign the Shareholder Agreement to enable a rollup in the round. Once you’ve enabled a rollup in your round, you can click the 3-dot menu next to any investor to move them into the rollup, or move them out of the rollup.

You’ll also need to answer 5 fundraising-related questions as part of the FCA requirement to demonstrate that you know what you’re doing. And we’ll do a KYC check on the company and the rolled-up investors (there’s nothing you or they need to do).

How much will it cost to add a rollup in my funding round?
You can enable a rollup in your round for a one-time fixed cost of £2,490+VAT. That includes the legal documents, KYC checks, and our ongoing management and running of the nominee entity. That fee is due and payable when the round closes, and you end up using the rollup.

How do I get started?

To find out how we can help you with your funding round, book a free call with one of our funding strategists.

 

Anthony Rose

Anthony Rose

Serial entrepreneur and startup champion, Anthony is our CEO and Co-Founder.
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