What are the benefits of Marivest syndications?
Companies Seeking Capital Investment:
- Increase their access to capital – without having to deal directly with a large number of small investors.
- Decreases costs –
- Legal costs are decreased as there are fewer contracts, term sheets and deal negotiations.
- Lowers the cost of shareholder management in both time and money while positioning the company favorably for later stage investment by larger angel and venture capital organizations.
- They get the attention of a key investor who understands the industry and can connect them to new opportunities, markets and quality new team members.
- They get access to the backers’ networks without putting each one on the cap table.
- Collect many small investments that aggregate into a larger funding round.
How do syndicates work?
Here’s an example.
Marvest, LLC decides to lead a syndicate and back a cannabis company that we have done due diligence on. We negotiate with the company for a $500K allocation at favorable terms for the syndicate. Marivest organized and invests funds in the syndicate and offers an opportunity to the balance to our investment partners network .
Investors invest in the syndicate by agreeing to invest based upon the minimum requirements of the originally negotiated deal. Typically a deal this size would require a $10,000 minimum investment from the accredited investors that wish to participate. Syndicates are formed under SEC guidelines that allow for an investment fund to have up to 50 investors – so a minimum is easily decided upon by taking the total amount of allocation and dividing it by 50!
Marivest uses the standard subscription agreement and funding system managed by independent third party administrator. By using standard templates for these agreements an investor and the lead always know their standing in ALL syndicates they invest in, reducing the costs for all parties.
The issuer and the syndicate are managed by an independent 3rd party using the automated systems for investor onboarding and shareholder management services. This reduces their costs including legal expenses as well as lowers time normally associated with these services. More money flows into the company and they can focus their time and money on growing their business – a win / win for everyone!
The documents used are already accepted and understood by leading angel groups and the National Venture Capital Association so later round funding and due diligence is a simpler, lower cost solution going forward as the company goes after additional rounds of funding to grow and accelerate their business.
How cost effective are fund administration services?
Let’s compare costs to FundersClub.com, a leading system that syndicates early stage start-ups in varying sectors. FundersClub takes 10% of the amount funded and puts it aside for formation and ongoing management of the syndicate LLC. If they raise $500,000 for the syndicate, $450,000 goes to the company and $50,000 is put aside for costs.
With Marivest syndicates, the cost to set up the fund is fixed at $2000 – so the company would receive $498,000. The issuer receives more capital and the investors receive more equity without dilution of their initial investment – definitely a winning combination!
Each year, the issuing company pays a guaranteed minimum dividend (or royalty) to the syndicate of $2000 or a percentage of fund revenues (whichever is greater), enough to cover all the services needed to administrate the syndicate. the management escrow has a minimum charge of $2000 to make sure the syndicate LLC is registered properly and provides ongoing shareholder management services to the syndicate LLC and their shareholders, including but not limited to annual federal tax filings and appropriate K-1 for the limited partners.
Our independent 3rd party management does not take carried interest which increases overall value for Marivest and our investors in the syndicate LLC.
Are the negotiated deal terms attractive?
We believe that our deal terms standards offers a winning deal for everyone involved – the company seeking funds, the marketing partner lead, and the investors in the syndicate LLC.
We use standard equity agreements that are accepted by the top angel groups and venture funds across the country. This equity agreement has one variation, and that is that the issuing company will pay a royalty annually to the syndicate LLC in addition to equity participation. Royalties are considered normal for investing in oil and gas partnerships, investing in entertainment industry, the publishing industry and many others.
It has significant benefits for all parties involved –
- Royalties are negotiable.
- The issuing company does not report royalties or the equity as debt which maintains their valuation moving forward and keeps their balance sheet free of debt.
- The issuing company can negotiate less dilution of their equity.
- The issuing company can plan for a fixed cost as a percentage that can fluctuate with their business growth and revenues.
- Once the original investment is paid back, the royalty is usually reduced which increases the issuing company cash flows that can be used to further expedite company growth and increase the overall company valuation. This is negotiated by Marivest the fund lead.
- The syndicate, along with each and every one of the investors, may receive an annual cash return on their investment which is managed and distributed by an independent third party administartor along with tax documents and other communications. This minimizes the overall investment risk while allowing for increased returns to the investors as the company grows their business.
- The syndicate remains vested via their equity and royalties in the growth of the company, and can share as revenues grow or as the company possible gets an exit via acquisition, merger or an IPO.
What’s the legal structure for a syndicate?
Syndicate investors don’t invest directly in the company but rather invest is a special purpose company fund LLC (SPCF) that is created for each specific investment. Each fund is registered in Delaware and has a physical location for business in Florida. The fund is administered by an independent third party and advised and managed by Marivest Marivest receives the carried interest the general manager of the syndicate. Investors receive any equity in the special purpose LLC.
Marivest as the fund lead is required to advise the fund, tell the fund how they voted (or would vote) their shares and if they buy or sell shares. The fund will generally follow unless there’s a good reason not to (e.g., conflict of interest).
All syndicate LLCs a use a standard operating agreement. This is much easier for investors, as they always know and understand the terms they are investing under.
Does Marivest verify that investors are accredited?
Marivest & our independent fund administrator will put all syndicate investors through the appropriate accredited investor screening as required and outlined by the Securities and Exchange Commission (SEC).
What is carry?
Carry is shorthand for carried interest. Carry is a percentage of the profit and capital returns to the fund, if any. If the company has an exit via a merger, acquisition or IPO as examples, the pro-rata proceeds of the exit are paid to the syndicate and the syndicate lead receives a percentage of the profits paid along with the syndicate investors. This keeps everyone’s interest properly aligned!
Is the carry for a syndicate calculated the same as a carry for a venture capital fund?
No. Carry for venture funds is calculated on the outcome of a portfolio, meaning the upside in some deals must first pay back the losses in others before any carry is paid.
Carry in a syndicate is calculated on the outcome of an individual company. This allows accredited investors to choose which companies and syndicate leads to invest in while paying a small carry premium versus venture funds.
What is the SEC’s investor limit?
Due to securities regulations, the investment fund is limited to 100 total members.
Qualified purchasers investing through a different fund do not count towards this limit. Qualified purchasers include (1) individuals with over $5M in investments and (2) trusts or companies with over $25M in investments.
For example, a single syndicate can accept an infinite number of qualified purchasers investing through one fund and 99 non-qualified—but accredited—investors investing through another fund simultaneously. Why 99? Because the lead counts as a member of the fund, and has his/her interests aligned directly with the fund investors.Companies Seeking Funding: Do I have to deal with a million new investors?
What happens if the syndicate is oversubscribed?
There are a couple of different scenarios that could happen.
- The company may decide to increase their allotment to the syndicate
- We set as a standard first in, last out meaning investors that commit earlier will receive preferential treatment.
What is the cost of syndication?
Companies pay nothing to receive an investment from a syndicate. However, the company does agree to have their shareholder services and cap table management provided by an independent fund administrator which allows Marivest to have full transparency on any changes to equity going forward. Fund administrator fees are typically much less that a company would pay for this service to outside third parties while providing services that include option and warrant tracking, proxy voting, document management and distribution, certificate management and more – all for less than $5 per day.
Backers pay no fees on their investment.
Out-of-pocket setup costs for each syndicate are paid out of the syndicate. Costs are currently set at $2,000 per fund and are deducted from the funds raised.
Marivest does not receive any of this money – it is paid to a independent fund administrator set up as a Delaware registered corporation They administrates the fund and pays as required any other third parties such as state regulatory agencies, payment processors, attorneys and accountants.No. The investors invest in a fund which then invests in the startup. Only the fund is listed on the startup’s cap table—the individual investors in the fund are not.
The fund (Delaware LLC) is advised by Marivest who has the responsibility to sign documents and makes decisions on behalf of the LLC.
This is equivalent to adding a single large investor to the round which keeps your legal costs down and administrative time to a minimum.
Companies Seeking Funding: Can my company be syndicated?
Your company must be a US-based corporation Sometimes other entity types can also be syndicated. Contact email@example.com to discuss any exceptions.
Companies Seeking Funding: On what terms does the syndicate invest?
The syndicate will invest on whatever terms you negotiate with your syndicate lead. The terms will include a determined amount of equity along with annual royalty payments.
Companies Seeking Funding: Do investors in the LLC count towards my company’s shareholder limit?
Yes. A syndicate only adds one investor to the company’s cap table (it pools investors capital into one fund), but each individual investor still counts toward the SEC 1,999 shareholder limit.
Companies – Are syndicates legal?
Marivest, LLC & and our fund administrator comply with securities regulations. There have been no-action letters filed by the SEC regarding these types of syndicates, including letters issuer to Angel List and FundersClub.