The saying: “no good deed goes unpunished” is particularly true in the world of angel groups. Group organizers start with the best of intentions: to support local entrepreneurs, to make investing efficient, to educate new investors, and to promote economic development. These individuals often make the mistake of donating their time up front and then leaving in frustration many years down the line. But it doesn’t have to be this way!
In our case, Kevin was a founder of the Boise Angel Alliance, its volunteer spark plug and a non-compensated board member for years. He’s the volunteer managing member of three syndicates. “Volunteer” means he does the work out of the goodness of his heart and doesn’t get paid. Denise’s first foray into angel investing resulted in her being the managing member of a syndicate she bought into, which ten years later is still holding its investment. She’s the volunteer managing member of three others.
Now these syndicates are all with friends as investors. But even friends need reminding to execute documents, lose their K-1s, gift their interests to trusts or their children, get married or divorced, and forget to make their capital calls. And of course, all those things cause work for the managing member.
These early experiences in our investing journey were the genesis of Loon Creek Capital. We formed the company with the goal of providing a professional administration option for group organizers. As we traveled the country attending Angel Capital Association events, we heard the same story time and again by angel group organizers. Like us, these individuals were the Do-ers who made things happen and often donated their time to the cause, but then regretted it later. They eventually lost the motivation and/or found it economically impossible to volunteer for years on end, but when they tried to migrate to a paid model their colleagues pushed back - hard. Why? Because of simple human nature: it’s very hard to start paying for something you once got for free (think of how frustrated you get when your favorite ‘freemium’ app starts charging you for features).
In addition to advising these individuals “charge something, anything, just set the expectation up front that you will be paid!”, we designed our service offerings to include payment models for the organizers. As many of them were investing through syndicates in addition to their group or fund, we began collaborating on how we could minimize the work associated with setting up and managing a syndicate in order to make utilizing them as easy as possible. We, of course, believe that our Streamline service does just that.
But even with Streamline, someone has to agree to be the managing member and accept the responsibility of directing Loon Creek, signing the documents, authorizing the payment of expenses and hopefully distributions, and when necessary, signing the tax return. Often the managing member also selects the investment and corrals the investors. In keeping with our theme that the Do-ers should be paid, is it always appropriate for the managing member to be compensated and if so, how?
For many of our managing members, this is a one-time thing. For these people, it’s simply a way to give back, to help entrepreneurs raise capital, and to help friends spread investment risk by enabling them to share in a syndicate. Typically, these managing members don’t expect to get paid for their efforts.
For others, they are bringing their professional expertise to the table. Typically, they help select the investment, and often are the manager of multiple syndicates. These managing members expect to receive compensation for this responsibility and the members should expect to pay for the service. We have written about one scenario where this is the case in another blog post.
The angel community has innovated on many different fee models and each group has their own approach, but it is still very common in most groups to include compensation through a share of the carry. In lay terms, carry is a share of the investment profits. Once an investment has returned 100% of the investors’ capital contributions, any additional amounts are “carry.” Venture capital management companies usually receive 20% of the carry. Angel group managers receive anywhere from 5-20% of the carry. Syndicate managers generally receive 1-10%.
An example of how carry would work in a syndicate: ten investors each contribute $10,000. One investor agrees to be the managing member for 10% of the carry. The syndicate invests the $100,000 into stock in an early stage company. The syndicate ultimately sells the stock for $300,000. Here’s how the $300,000 would be distributed:
Sales proceeds $300,000
Less initial capital returned to members $100,000
10% share to managing member $20,000
Balance to members $180,000
Total returned to members (2. Initial capital plus 5. Balance to members) $280,000
Each investor receives $28,000. The managing member receives an additional $20,000 to compensate her for her work.
Regardless of the form of your group, fund or syndicate, its long-term success depends on keeping individuals engaged and doing the work. Our experience and observations have proven that this is difficult, if not impossible in a solely volunteer organization. Those of you who are considering starting an angel group or forming a syndicate: please do yourself (and your group) a favor and take some sort of compensation for your efforts! Loon Creek is happy to work with you either way. Get in touch with us if you would like to discuss how this works in more detail.
Loon Creek specializes in syndicate formation and management services for private investors (and for the companies in which they invest). You can learn more about our services on our website.