Background
A syndicate is when you do a financing where there is not a dominant lead in the round.
Normally, you will have an institutional investor be the “lead”. In this lead role, they are usually putting in at least ⅓ of the round (and generally at least ½ of the round), and setting the terms that the other investors will follow.
A syndicate is a round where the Company sets the terms, and no investor has a dominant position. E.g. you raise $3 million from 10 investors that put in $300K each.
Why use a syndicate?
You may have a situation where you have a bunch of investors that say “keep me posted when you get a lead”. These are investors that don’t have the conviction to lead, but want to invest if someone else has the conviction to lead -- they want all the upside with none of the risk.
Now, you may never get a lead, but you might be oversubscribed with followers. In this situation, you need to lead -- you need to have the company set the terms that the investors will invest under.
Even if you do get a lead, you may choose to do a syndicate because you can control the terms. Generally you can get a higher valuation and not have to give up control / governance if you do the work of forming a syndicate.
Process for a syndicate
Here is a process for driving a syndicate from the angels that are saying keep me posted when you have a lead.
I would send two emails: (1) to confirm if they are interested in a syndicate and then (2) a follow up email w/ the Term Sheet. The term sheet is not legally binding to you or them -- it's just to soft circle their commitment. If we want to hard confirm the syndicate we'll send a SAFE for signature -- which would be email 3.
Here's email 1:
Subj: Update re: [Company]’s round
[Angel / Small Fund] -
I wanted to check in re: [Company]’s round.
Let me explain how the round is shaping up. And if you are interested in staying looped in, I detail next steps below.
We have been blessed with many terrific investors who want to support [Company] in its next phase. We are in late stage diligence with significant institutional lead VCs. The indication we are getting is that there likely will be no room for you -- or our other smaller investors -- with the lead VC offers.
As an alternative, we are thinking of doing a syndicate round. That is, a round where we can have a plurality of investors, but no one dominant lead. This would allow us to accommodate the many terrific, but smaller, investor checks that have expressed interest in investing in the round.
If the only path forward to allow us to have you invest in the company would be through a syndicate, are you interested?
If so, I will follow up with a non-binding MOU that you will need to fill in and sign to circle the amount you would want to do in the round.
Please let us know if you want to proceed.
Cheers,
Rohan
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Email 2: If they confirm they want to stay connected send this.
[Attach doc below]
[Investor Name] -
Good to hear that you would be interested in the syndicate. To be clear, we not decided yet if will do the syndicate path or not.
But as a next step, we wanted to soft circle how much you would want to do in the round. I'm attaching the non-binding term sheet for the round below.
To soft circle a spot in the round, please fill in the amount you are interested in in yellow, and sign the cover sheet.
This does not bind you or us legally. Having said that, we will assume this is a good faith commitment if we decide to move forward with a syndicate round that you would be interested in the amount you specify.
If we do move forward with a syndicate, we will follow up with a legally binding SAFE for final signature, and you may have a short window (e.g. 24 hours) to hard confirm the commitment.
If you would require any edits to this term sheet to participate, please let us know or direct edit the docs and send back.
Cheers,
Your Name
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Attach to this second email a filled out version of either:
OR
An equity based term sheet like this (generally this is not preferred unless you are raising at least $3m) (DO NOT COUNTER SIGN THIS, just send this to have them soft circle their interests)..
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In parallel with this process you should drive all your other investors that can lead to issue a term sheet.
And then decide if you want to go forward with the institutionally led term sheet or this syndicate.
If you go fwd w/ the syndicate, you will send legally binding SAFEs or a Term Sheet you will counter sign.
Please reach out to the Alchemist team for help through this process.