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I’ve founded two startups, sold one, advise entrepreneurs and investors, and am an active angel investor (10 startups with investments between $5,000 and $25,000) and syndicate lead. In my day-to-day life, I’ve come across a fair amount of confusion over what exactly AngelList is, and whether an entrepreneur should look there for capital. So I’ve created this primer. (Think of it as a public service.)

An AngelList syndicate is a group of investors who invest together in a startup. It’s led by a syndicate lead who is an investor that sources the deal and gathers the rest of the investors to form a syndicate. The syndicate lead can effectively write larger checks than he could do alone through his syndicate of co-investors. Other investors can join a syndicate on a per-deal basis, or they can “back” the syndicate lead to automatically invest in every deal that lead investor creates, giving them guaranteed allocations on deal flow.

What types of startups could benefit from a syndicate? 

Seed investments – Use syndicates to fill part of your round. You can attach a syndicate to a partially filled round, or begin fundraising a new round with a syndicate.

Done deals – Adding on a syndicate to a done deal can get a little extra cash into a startup to extend their runway or give them more financial headroom to hit their next milestone, as well as the rest of the benefits listed below, without doing a lot of legwork fundraising again.

Startups caught in a Series A crunch – Many startups have respectable growth and traction, but perhaps required a couple of pivots (or made some recruiting mistakes along the way) and are not ready for a full Series A. Syndicates can act as a “bridge round” or “super seed round” to get you to the point where you’ve got a traction level necessary for a full Series A, assuming you’ve hit your traction stride to deserve a bridge round. Note that for a clean signal, existing investors double-down on the bridge round and lead the syndicate – if they are not willing to support you, then your syndicate will likely not work due to negative signal risk.

VCs – Sometimes VCs may have pro-rata (follow-on) rights to put more money into their deals in future funding rounds, but because of their financial situation or investment thesis, they can only partially fill this using their own funds. Now, VCs can syndicate out part of their pro-rata on deals to earn their limited partners (LPs) additional carry (gain) on the investments. Again, for a clean signal to make sure the syndicate succeeds, the more investor commitments from the previous investors, the better.

The benefits of syndicating your startup

You attract a large group of investors with skin in the game – True crowdfunding from non-accredited investors isn’t here yet, but the benefits of crowdfunding are appealing – you can have a pool of investors behind your startup, each with skin-in-the-game. This skin-in-the-game is key: Those investors may aid down the line in the form of recruiting, partnerships, introductions, advice, publicity, spreading the word about you.  Each investor may only be putting in a small amount ($1,000 to $100,000) but that investment level may be a meaningful amount to that particular investor. We are still waiting for true crowdfunding where anyone can invest in a startup. Until then, you need to be an accredited investor (make $200,000/year or have $1 million in net worth). AngelList syndicates provide you that opportunity today to crowdsource funding through accredited investors.

Raise from multiple angels without a complex cap table — Historically it’s been tough as an entrepreneur to raise from a large number of angels, because it makes for a bloated cap table and makes signatures for future rounds later-on more difficult, and can sometimes feel like herding cats. Syndicates solves this — you only need a single signature from the syndicate lead.

The publicity of a syndicate can attract investors who write larger checks than the syndicate supports – For check sizes larger than $100,000, investors can invest directly into your startup rather than going through the syndicate. Being a syndicated deal gives you exposure to those larger angels and VCs and can help you fill the round outside of the syndicated allocation. As a concrete example, one of the deals that I got featured last year received more meetings with VCs in a week than they could schedule into their calendar — and this was over-the-phone meetings, not face-to-face. Syndicated deals can have similar potential depending on how well-promoted the syndicated deal is.

Get exposure for your startup to customers, partners, and recruits — By being a well-promoted syndicated deal, lots of people in the startup ecosystem will see your startup. One of the SaaS deals that I helped get featured last year told me the biggest benefit to AngelList promotion was they received myriad new startups as customers to their platform.

Drawbacks or risks of syndicating your startup

Exposes your startup’s secrets more broadly — Secretiveness isn’t necessarily useful for all startups, and many startups are over-protective of their secrets and should be focusing more on execution and getting feedback from others. However, for some startups, keeping things under-wraps is genuinely important since they want to hit the market hard on launch. This isn’t as easy to do with syndicates.  If you need your startup to be a secret, then look for a syndicate lead that has enough in backing to fill your syndicate by himself and his backers. That way, you don’t need to reveal information to other investors who join the syndicate on-the-fly.

Another compromise option is to reveal only a portion of your startup to investors on your AngelList profile. Of course, the more secretive you are, the tougher it may be to fill the syndicate. So rather than making your entire slide deck public, you can make what I call a “1-pager” which is a 1-page overview of your startup. Click here for a sample 1-pager I helped create for one of the startups I advise and invested in. Note that AngelList now allows for “private syndicates” where you can syndicate a deal to your trusted keiretsu of friends, mentors, investors, and advisors.  This overcomes the challenge where startups need to share information publicly.

Smaller investors can’t invest unless they pay a carry to the syndicate lead – For startups that don’t use syndicates, they can use “Invest Online” or accept funding manually through AngelList intros and manual networking.  This more “traditional” form of fundraising does not give you any of the benefits listed above for syndicates, but has the benefit that smaller investors can write checks without having to pay a percentage of the gain of your startup upon an exit (called a “carry”) back to the syndicate lead.  This reduces friction when convincing a small investor to cut a check.

There are potential signal risks if you’re not careful — Signaling is a very important concept in investing — if a lead investor in your seed round does not double-down on your next round, it could cause future investors to wonder what’s wrong with your deal. This phenomenon killed one of the startups I invested in last year even though they hit their stride on growth and revenue.  One way you can mitigate this is to not have your entire round come from a syndicate lead — but to involve multiple super-angels or VCs. That way, if one investor doesn’t double-down, then the others can pick up the slack.

Finally, choose the right syndicate lead — Some qualities to look for are:

  • Capability to follow-on on next round to send a positive signal
  • Connections with VCs who trust them, that they have worked with in the past
  • History of getting involved / helping / advisory work for startups
  • Enough time to devote to your deal (i.e. doesn’t have too much going on)
  • Has enough followers, or backing, or the right connections to investors to get your deal filled

Overall, for most startups, the benefits of syndication often outweigh the drawbacks if entrepreneurs take the proper mitigation approaches.

[Illustration by Hallie Bateman for Pando]