Angel syndicates – who takes the lead?

Angel investment can be time consuming and complex endeavour. As a result there is a growing trend for angel investors to act in a syndicate. William Robins explains how angel syndicates work and their benefits.

What is an angel syndicate?

An angel syndicate is simply a group of investors who agree to invest together in a particular project. A syndicate can be put together by angels or investees and be drawn from any source; often syndicates include angels from more than one investment network. While there need be no further conditions, to make the syndicate workable, typically all investors would reach a (non legally binding) gentlemen’s agreement as to how the syndicate will operate. Any such agreement is seldom in written and kept both brief and simple.

Speaking with one voice

A lead investor is a necessary by-product of any functional angel syndicate and allows the syndicate to speak with one voice. His (93% of all angels are male) role is to:

• Co-ordinate the syndicate – this includes the conduct of due diligence and heads of terms negotiations and may also include finding further investors if required. Following any investment, this will include acting as the conduit between the investors and the company.
• Sit on the board after investment – while there are no hard and fast rules, a lead investor would typically be the investor best placed to work with the company, taking into account the time and skills he has to offer and also that he will most probably have built up a good working relationship with the investee while acting as lead investor before the investment completes.

By working together investors will be able to do more. From being able to bring a wider range of skills and years of experience to bear during due diligence to having a stronger combined negotiating position and thus being able to secure more favourable terms. They should also be able to close the deal more cheaply, as they will have less of a need for professional advice and the advice required will be more focussed, and more quickly as bi-lateral negotiations are always less complex and divisive than multi-lateral negotiations.

Finally, there is a strong belief in the market that each investor significantly reduces the risk of making a poor investment when working collaboratively with other angels.

Or being drowned out

It is relatively hard to think of reasons why an investor would prefer to "go it alone". It might be the concern that he’ll lose his individual bargaining power when subsumed by the group, it might be he’d actually benefit from a "divide and rule" approach. Equally it could be a desire to have more personal contact with the investee and to ensure that any investment decision is not influenced by others.

Angel investment is often a personal decision and there will always be people who simply don’t like syndicate deals.

Due diligence begins at home

Many investors spend a considerable amount of time conducting due diligence on the investee (the balance tend to trust their instincts or to follow other investors they trust). By investing as part of a syndicate an investor has an implicit opportunity to conduct due diligence on his fellow investors. Invariably such ‘investor’ due diligence is limited to discussions about past deals, current business interests and a ‘gut reaction’ to comments raised on the investment opportunity under discussion, but this still provides essential comfort before committing to invest. On this basis it is in everyone’s interests for the potential syndicate to meet or convene on conference calls. Indeed, savvy investees are realising this too and increasingly bringing the potential investors together at an early stage.

What’s in it for the lead investor?

In most cases the lead investor continues to lead the syndicate post-investment. This could see him being appointed as a board observer, non- executive director or investor director.

In any event, both during negotiations and post-investment such investor would have an enhanced ability to influence the affairs of the investee and in particular to use his skills, contacts and time to improve the company’s performance which in turn increases the value of his investment.

While this is probably the most important benefit, there are many other reasons why an investor might dedicate the time required to fulfil this role: he might find his involvement personally satisfying or his involvement might lead to other business or investment opportunities that he seeks. On occasion he may be remunerated for his role.

Opinion is very much divided on the subject: the lead investor’s interests must remain aligned with his co-investors and steps must be taken to ensure the lead investor does not ‘go native’. However, neither objection is insurmountable and, where subsequently appointed to the board as a non-executive director or investor director, he may be paid anything from £500 to £5,000 per quarter, depending on how demanding the role is and what special skills he has.

Higher salaries than this are not unheard of, but only where they do not detract from the more important driver of achieving a profitable exit. A common compromise that recognises the value of the non-executive director or investor director’s time without diverting attention away from an exit is to defer and roll up any salary and/or to pay the lead investor in options rather than cash. Where appropriate such recompense can be linked to the company achieving targets defined in the business plan or elsewhere; though such incentives are more commonly used for executive directors.

For completeness, it is worth noting that it would be highly unusual for a lead investor to receive any recompense in relation to due diligence and there is merit in making any subsequent role of investor director or non-executive director subject to rotation or re-election.

This article is an edited extract of a Keynotes Article Angel Syndicates.Click here to download a copy of the original article, which also includes:

• Commentary from leading angel investors
• A sample timeline
• Sample rules of engagement
• Details of the Keystone syndicate facilitation service.

For further information on angel investing contact William Robins a solicitor inKeystone’s Corporate Team.