Raising Cash - understanding SEC red tape and Angel Syndicates
President Obama passed the Jumpstart Our Businesses Act (JOBS) to make it easier to raise capital by allowing startups to publicly solicit angel investors, right? So, the SEC adopted parts of the ACT (yay) and then crashed the party a bit by adding new concepts to securities regulation D that will require startups to fill out more paperwork, interpret vague definitions, and make disclosures while announcing that they are to raise cash.
Essentially they make you have to do things like notify the SEC that you are raising cash and also make sure that you are raising cash with people who have enough money to gamble on startups like yours.
So basically, you cant just post to your blog and tweet that you are trying to raise cash and hope that you get bona fide angels and don't break any rules. The punishments in the new SEC rules are steep and can involve you not being able to raise cash for a whole year which could be a death sentence in certain tech industries.
Solution, find a network of angel investors or one angel investor who could find backers (syndicate) for additional capital.
A network of angel investors like River Valley Investors can be an invaluable resource but your timing in their cycle or their interest in your startup might not work out. How about that individual angel who loves your family?
The problem with your family friend angel is that she can only risk $50K and you need $500k to get your creative start up off the ground. What can both of you guys do to raise more cash? This is where the syndication can be helpful and profitable for your angel.
Online companies like Angel List allow your angel to quickly find qualified backers to invest alongside them by forming a syndicate. Now you have your $500k and your investor makes money from a carry fee kind of like a commission.
Here is an example
Your fam friend Sara wants a $250k of the $500k that the company needs. She personally takes $50K of the allocation and decides to syndicate the rest. She shares the deal with investors and specifies that she is charging a 20% carry on the remaining $200K of her allocation. Sara's capital and her co-investor's capital is pooled into a $250K fund which invests in your startup.