What is a syndicate? How to invest as a group
Pool your resources to support startups. Why join a syndicate, how to make your syndicate a success, and how SeedLegals...
A special purpose vehicle (SPV) is a type of company or partnership which allows investors to pool their money to invest together in a company.
If you’re an investor considering joining a syndicate, you might encounter syndicates which use SPVs to make their investments. In this post, we explain how SPVs work, their advantages and disadvantages, and some popular alternatives for groups of investors in the UK.
It might sound like a fancy Range Rover but a special purpose vehicle (SPV) is a legal entity, a type of company or partnership used by investors.
‘Special purpose’ means it’s set up as a one-off, especially for the investment.
‘Vehicle’ means it’s for carrying out a specific task, in this case for a group of investors to pool their money to make a one-off investment.
A group of investors puts money into an SPV, then the SPV invests in a target company.
A syndicate is a group of investors, whereas a special purpose vehicle is a type of company or partnership set up especially to make an investment.
One way that a syndicate can make an investment into a target company is by using an SPV.
In the UK, SPVs are often formed as a limited liability company (LLC) or limited partnerships. Investors then put money into the SPV to become members of the SPV. Each member has a membership interest: their percentage of the total money put into the SPV.
For example, if an investor puts £5,000 into an SPV that raises £100,000 in total, that investor’s membership interest is 5%
After raising money, the SPV makes a single investment in a target company. The SPV appears on the company’s cap table as a single entry.
SPVs are sometimes called pass-through vehicles because the SPV’s income ‘passes through’ to the SPV members.
For example, let’s say the SPV invests in a company and then later that company is acquired and the SPV gains £20 million. A member with 5% membership interest gets 5% of the income, £1 million, minus any carry fee.
For startup founders, SPVs can be an easy way to onboard multiple investors via one neat entry on the cap table. And for investors, special purpose vehicles are a popular way for syndicates to pool money to invest in a specific startup:
SPVs aren’t a perfect solution for investing as a group:
As with all investments in startups, the success of an investment via an SPV depends on the performance of the target company. This type of investment is high risk with no guarantee of a return.
The rules governing special purpose vehicles differ depending on the law in the country where the SPV is incorporated. For example, for SPVs incorporated in the US raising over $10 million, the limit is 100 investors.
You might also find the number of members restricted by the legal provider setting up the SPV for you.
For a group of angel investors, using a special purpose vehicle is not the only way to make an investment in a startup. Here are a few alternatives:
You can invest directly in a startup without needing to set up an SPV. In this case, each investor in your group negotiates their own investment terms directly with the startup.
You can use a platform such as SeedLegals to negotiate and sign your agreement. Investing directly gives you more autonomy in the deal and your relationship with the startup, but for the startup, it’s more complicated to coordinate multiple investors.
You could opt to support a startup via a convertible loan (at SeedLegals, these are called SeedNOTEs). These agreements are short-term loans to the startup that either convert into shares (usually at the next funding round) or the loan is repaid in full with agreed interest.
Startup founders often like convertible loan notes because they don’t need to determine the company valuation to sign the loan agreement.
You might prefer to use a convertible note because they give you specific protections and a discount on shares in a future funding round. If the startup thrives, your loan converts into equity and you get a stake in the company, often at discount. But if the company doesn’t raise a funding round, you might get your money back with interest – if the startup has set the convertible loan note to convert at maturity or be repaid.
With SeedLegals Syndicate*, there’s no need to go to the time and expense of creating an SPV for your deal, your syndicate can invest as a group using the SeedLegals MPL Nominees company.
You can use SeedLegals Syndicate to generate and share the legal documents to create your syndicate before you invest together in a startup fundraising on SeedLegals.
Your group of investors could collaborate to invest via crowdfunding in startups. Crowdfunding platforms have the legal structure set up behind the scenes so making an investment is fast and easy. Typically investors use crowdfunding platforms to invest smaller amounts into multiple companies.
As an investor via crowdfunding, you don’t hold the shares yourself. They’re held by the crowdfunding platform’s nominee company on behalf of all the crowd investors. For the startup raising via the crowdfunding platform, the crowd investors appear as one line on their cap table: the nominee company.
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.
To get started, find out more about SeedLegals Syndicate.
The fast and easy way for your group of angel investors to invest together as a syndicate in companies fundraising on SeedLegals. No SPV required!
How it works* All references to SeedLegals Syndicate refer to the Syndicate service provided by SeedLegals MPL Limited, company number 14319103. SeedLegals MPL is an appointed representative of Kroll Securities Limited, which is authorised and regulated by the Financial Conduct Authority FRN: 466588