Best Practices in Forming Investment Syndicates II
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 the second post discussing some of the best practices we have learned in helping our clients set up investment syndicates.
Company Reports. Companies should be reporting to their investors at least quarterly. Periodically they will need the managing member’s signature on documents relating to shareholder matters. If you have multiple syndicates, managing these communications can become unwieldy. Set up a mailbox to receive reports and requests from the underlying company in which the syndicate invests. Auto forward those reports and requests to the managing member.
Annual Reports. Prepare financial statements for the syndicate and email them to all members on an annual basis, even if there is no change to report. This not only reminds the members of their investment but also assures the email addresses are kept up to date.
Use Electronic Signatures. Electronic signatures have the obvious advantage of not having to sign and scan documents. The signers can execute the documents online immediately. There are a number of electronic signature systems on the marketplace which enable such signatures and offer the further advantage of tracking the documents. One such system is Docusign.
Operating Expenses. If it is known there will be operating expenses (e.g. there will be tax return preparation expenses when a note converts with accrued interest), call the funds to cover those expenses at the time the call is made for the initial investment. The cash can remain in the bank or trust account until needed, thereby avoiding small capital calls. If the cash is not needed, it can be returned to the investors.
Avoid tax returns. Tax returns cost time and money to prepare and generate K-1s for the investors. The IRS does not require a tax return in years where no taxable transactions have occurred. Making an investment is not a reportable transaction, but operating expenses may be. Keep set up and annual operating expenses out of the LLC by having the investors pay them personally. In such a scenario, a tax return must be filed only when a note with accrued interest converts, or the investment is sold or written off.
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.