Best Practices in Forming Investment Syndicates I
Loon Creek helps investors form and administer investment syndicates. This is one in a series of blog posts based upon our experiences in doing so. An investment syndicate (also known as a “single purpose vehicle” or a “single investment entity”) is a group of investors who combine together into some type of organizational vehicle in order to make an investment in a specific company. Usually the vehicle is a limited liability company (LLC).
In other posts I wrote about why investors might want to form investment syndicates and some of the decisions they must make to set up a syndicate. This is one of two posts discussing some of the best practices we have learned in helping our clients set up investment syndicates.
State. Choose the state in which you file your LLC wisely. Many states charge a significant fee to file the LLC, and an annual fee to maintain the entity. If there is an annual fee, then the syndicate will have to collect those fees in advance, or issue a capital call each year to gather the funds to pay the annual fee.
Operating Agreement. Use an Operating Agreement drafted specifically for a single investment in a single company. This greatly simplifies the drafting of the agreement, as it does not need to cover the possibility of multiple investments in multiple companies, a much more complicated structure.
Management. Use a manager-managed governance structure and vest in that manager most if not all decisions. Our experience is it is difficult to get syndicate members to vote on a timely basis, especially on relatively minor issues. For example, your syndicate may invest in a deal with protective provisions that require a vote of the shareholders to change the number of directors. Allow the manager to make those decisions for the group, reserving only major decisions such as sale of the investment to the members.
Funds. Many syndicates set up a bank account. However, the bank account will be used rarely. Once the investors contribute their capital and the investment is made, the bank account will sit dormant until there are annual fees or the investment is sold. We have found it is easier to use attorneys to receive, hold and disburse the funds through their trust account. This avoids having to set up a new bank account for each entity. It provides the added protection of a trust.
The above are just a few of the best practices we have learned in assisting our clients form investment syndicates. Decisions made when forming the LLC can minimize costs and inconvenience to the members throughout the life of the syndicate. In other posts I write more about each of the best practices.
Loon Creek specializes in syndication services for angel investors. You can learn more about our services on our web site.