How to invest in startups: step-by-step guide
Learn how to invest in startups and how to make your first angel investment with our step-by-step guide.
Investing as a syndicate can be an effective way to pool your cash and expertise with other angel investors to support early-stage companies.
Whether you’re thinking about joining a syndicate or you’ve been part of a syndicate for a while, this blog post is for you. We explain why some investors prefer to invest as a group, how to make your syndicate a success, and how SeedLegals make it easy to invest as a syndicate.
Let’s start with the basics. When investors get together as a group and invest together, they’re a syndicate. Usually syndicates have a lead investor who makes final decisions and communicates with the investee company on behalf of the syndicate. The other members of the syndicate are often called follow investors.
For startups, having a syndicate invest in the company can be easier than having lots of separate investors. With just one point of contact, communications are streamlined. The company communicates only with the lead investor who represents the collective interests of the syndicate. Usually syndicates have established an efficient decision-making process so it’s much easier for the company to get resolutions signed off by a syndicate than by lots of separate investors.
This table sets out the roles and responsibilities of the lead investor and follow investors in a syndicate:
|Investors in a syndicate – roles and responsibilities|
|Lead investor||Follow investors|
|finds deals||✔️||not obliged to, but can propose deals|
|negotiates with potential investee companies||✔️||❌|
|invests money in syndicate deals||✔️||✔️|
|signs investment documents with investee companies||✔️ or a nominee signs on behalf of the syndicate||❌|
|signs Syndicate Agreement||✔️||✔️|
|can claim SEIS/EIS tax relief (if investment and individual are eligible)||✔️||✔️|
|communicates with investee companies||✔️||not obliged to, but can be involved|
|liaises with syndicate members||✔️||❌|
|votes on behalf of syndicate||✔️||❌|
|earns carry fee for successful investment||✔️||❌|
Being a solo angel investor can be a lonely experience. For new investors, finding a mentor, joining a network or signing up to a syndicate can help you learn how equity investing works and avoid making costly mistakes.
Many angel investors join networks such as the UK Business Angels Association or you might find an investor group in your area or in the sector you aim to invest in. And for many investors, operating as a syndicate offers more advantages than going solo. Here are the top five reasons investors join a syndicate:
Got £10,00 to invest? With a syndicate, you could join other investors to offer investee companies a combined total of £200,000. Got 25 years’ experience working in financial services? Great – join a syndicate with others in the legal, engineering and construction sectors to combine your experience.
Your syndicate can offer far more to investees than you could alone – which means you’re more likely to have access to the best deals…
Raising investment is a two-way transaction – companies raising cash need to make sure their investors are the right match. The money your syndicate can offer isn’t the only factor that gives your syndicate clout – your combined years of experience and network connections are also very attractive to investee companies. Plus, as mentioned above, investees often prefer having a syndicate on their cap table because the group is much easier to negotiate and communicate with than lots of individual investors.
As a member of a syndicate with a reliable lead investor, you should gain access to more exciting deals than you’d be able to secure solo.
Most investors prefer to maintain a well-balanced portfolio to increase the chances that you’ll make a successful return on investments. With this in mind, syndicates usually spread investments across several startups, to reduce the risk associated with putting all of the syndicate’s cash into a single company.
If you have £20,000 to invest, that might be just one solo angel investment. But with a syndicate you could split this as £5K into four different companies, to diversify your investments.
In a syndicate, the lead investor is usually responsible for researching the target investee’s market, testing the products, scrutinising the pitch deck, financials and team, negotiating with the company, and doing thorough due diligence.
All this work takes considerable time and skill – that’s why the lead investor earns a fee (known as the carry) when investments successfully deliver a return.
As a follow investor, it’s reassuring that this important research and due diligence has been carried out by an expert investor on your behalf.
As a member of a syndicate, you cut down massively on your admin time. The lead investor handles all the negotiations, sorts out the legal documentation, and communicates with portfolio companies on behalf of the syndicate.
When you need to be involved in important decisions, or if there are opportunities to be more involved, the lead investor will be in touch.
While the lead investor takes on most of the responsibility for the success of a syndicate, the syndicate members also play their part. Here are some factors to consider when you’re researching syndicates, and after you join:
Usually syndicates are led by an experienced investor who takes the role of lead investor for the group. The lead is usually responsible for finding deals, negotiating with companies and carrying out due diligence.
The lead guides syndicate members through the investment process so it’s important they’re a clear communicator. Make sure the lead investor for your syndicate has a track record of success and extensive knowledge of the sectors the syndicate invests in.
Different jurisdictions have different regulations governing investment syndicates. The lead investor should make sure the syndicate is compliant in the area it operates. As a follow investor, this is something to check when you join the syndicate.
Is the syndicate structure legally compliant? Are the syndicate agreements clear and compliant? Does the lead investor work with legal professionals who are experts in startup investments? A bona fide lead investor will be happy to answer your questions.
The moment you send your funds to the investee company is the start of your new relationship with that company as an investor. Although many investors have little involvement with their portfolio companies, some take a more active role to help the company succeed.
When you’re a member of a syndicate, rather than giving your individual support to an investee company, you can offer support as a group. This spreads the commitment across the group, and can better use the different skills of the members. For example, the syndicate might offer the company mentoring, contacts and connections, strategic guidance and more, depending on the experience and availability of group members.
The lead investor of your syndicate should monitor the progress of the syndicate’s portfolio and communicate with the group about opportunities to be involved. Over time, what investee companies need will change, so the syndicate should be prepared to dial up or down their support as required.
For many investors in the UK, a major attraction of angel investing is the generous tax relief offered by the government’s Enterprise Investment Schemes (SEIS and EIS). But can you get SEIS/EIS tax relief if you invest via a syndicate? Yes you can – as long as you as an individual and the investment are eligible.
Some syndicates only make investments which are eligible for SEIS/EIS. Talk to the lead investor about whether an investment proposal is eligible for SEIS/EIS, and check they know you’re eligible as an individual. Then, after the investment has closed, make sure the lead sends you the documents you need to claim the tax relief in your self-assessment tax return.
Syndicates can be a supportive and relatively safer way for experienced angel investors and people new to investing to pool their resources. Before you join or set up a syndicate, be clear about your investment goals, expectations and exit strategies, to make sure you align with the group.
As syndicate members, you’ll collaborate, trust each other, and commit to helping startups succeed. The road to a successful return could be a long one – as a syndicate, you’ll go on that journey together.
At SeedLegals, we’re market-leading experts for early-stage deals. Since 2017, thousands of angels, VCs and funds have invested over £1.3 billion in companies on SeedLegals.
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