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