Understanding An Online Funding Platform – AngelList Syndicates

By: Matt Dunbar, Upstate Carolina Angel Network

ACA recently hosted a Webinar with AngelList co-founder Naval Ravikant to help members learn more about the AngelList syndicates platform. During the hour-long webinar Ravikant explained how AngelList syndicates work and how they enable entrepreneurs and angel groups to attract more investors to fill out funding rounds. Here is a quick summary of some of the details Ravikant shared during the wide-ranging Webinar:

Q: How does a deal get syndicated through the AngelList platform?

A: Although any entrepreneur can post a deal to AngelList and try to attract investors, the syndicates platform requires a lead investor. The lead investor can be an individual angel, angel group, or seed fund that sets the terms, commits initial funding to the round, and provides an investor’s perspective on the candidate company. The syndicates platform is simply a vehicle to attract other investors to the deal. 

Q: Do AngelList syndicates fall under the new 506(c) general solicitation rules?

A: The entrepreneur and lead investor can choose to raise funds publicly under the new 506(c) rules, which require a higher burden of proof that all investors are accredited (and will also include additional filing requirements when the SEC publishes its final rules on the subject). Alternatively, we have created a way for syndicates to operate under the 506(b) rules, which still allow for self-certification of accreditation status.

Q: Does the individual investor have to be an approved accredited investor?

A: Yes - AngelList only accepts accredited investors. For companies raising funds publicly, AngelList provides an accreditation verification system for investors to verify their accreditation.

Q: What kind of fees do AngelList and the lead investor make from a deal syndicated through the platform?

A: There are no upfront fees to set up a syndicate. AngelList receives a 5 percent carried interest on profits returned to investors participating through the platform. Lead investors can choose to take an additional carry of up to 20 percent.

Q: If a lead investor has already committed funds and comes to AngelList to raise additional capital, would the lead investor have to pay a carry on the initial funds?

A: No. The carry applies only to the funds raised through AngelList.

Q: How does AngelList make money?

A: AngelList's core business model is focused on revenues from matching startups with talent. The syndicates platform has high upfront costs to AngelList, which AngelList hopes to cover through the 5 percent carried interest.

Q: What type of liability does a lead investor take on by syndicating a deal through this type of platform?

A: Liability concerns are top of mind for the company and for investors, so AngelList has worked to provide as much protection as possible. AngelList creates a separate Limited Liability Company for each investment to help clearly define and limit potential liabilities. AngelList shields deal leads from liability as much as possible by making sure that every investor is accredited and reasonably sophisticated. We help educate them. We make sure they understand they're probably going to lose their money, that this is a very high-risk investment. They each go through an education process every time they do a deal. We encourage the leads to only accept backers who are sophisticated by giving them data on how many deals they've done.
ACA offers more than a dozen Webinars each year aimed directly at angel investors. If this information is interesting to you, please feel free to join ACA as an angel group or individual accredited investor by clicking here.

[Matt Dunbar is an ACA board member and is managing director of Upstate Carolina Angel Network, and conducted the Webinar interview of Naval Ravikant.]


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