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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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AngelList Syndicate Feedback From An Experienced Entrepreneur

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We recently funded Blinkfire Analytics using our FG Angels Syndicate. The CEO and founder, Steve Olechowski, was co-founder / COO of FeedBurner, which Google acquired in 2007. I was an investor and on the board of FeedBurner, which is how I got to know Steve.

If you don’t know the FeedBurner story, there were four FeedBurner founders – Dick Costolo (now CEO of Twitter), Eric Lunt (now CTO of BrightTag and until recently a board member at Gnip, which Twitter just acquired), Matt Shobe (now at AngelList), and Steve.

In addition to bootstrapping his new company forever (since he’s a multi-time successful entrepreneur), Steve could easily raise an angel round any time he wanted to. So, we were psyched he was willing to do an FG Angels Syndicate with us.

Steve had some unsolicited comments for me, AngelList, and angels as a result of the process. I asked him if I could post them – he said yes. Following is a thoughtful set of reasons AngelList is so powerful, along with some constructive feedback for us to consider.

1) Some of your backers are really good citizens.  When it was oversubscribed they kept their syndicate commitment, but offered a much bigger investment outside the syndicate.  When 50% of the money didn’t close, they went back and put it back into the syndicate.

2) You have a bunch of “shadow backers” who seem to follow your investments, and then try to go direct to invest to avoid paying your carry.

3) There are some backers that request an awful lot of due diligence for a $1000 investment.   If they are that worried about losing $1000, perhaps AngelList isn’t the right place for them to be investing.

For us, the benefits of the syndicate are:

1) Access to capital we wouldn’t have otherwise been able to raise on angel list, and offline

2) Keeping the number of entries on our cap table relatively small

3) Though #2, we still have the transparency of knowing who the “LPs” are, and can mine them for help if needed

For the investors, the clear benefits are:

1) Access to deal flow they wouldn’t otherwise get

2) Ability to diversify their funds without a huge minimum ticket

3) Piggybacking on an investment thesis without having to do the research

The only negatives so far are the days of uncertainty where do you don’t know how much is going to get filled and if you need to generate more demand or turn people away on a daily basis.

Impact in Angel Investor Decisions

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I’ll be speaking at an Impact Angel Group event on February 12th. With a few other angel investors, I’ll be talking to other angel investors, along with prospective angel investors, about the role of impact investing the community, as well as in our own portfolios.

Among other things, we’ll discuss our angel investment strategies and openly share things like the percentage of our wealth that we allocate to angel and impact investing. We’ll also talk about how we balance our impact, risk, and financial goals. Finally, I’ll also discuss our experience with FG Angels and AngelList, along with the angel investment strategy I’ve used over the past 20 years.

I deeply believe that one of the best ways to accelerate a startup community is through more seed investing in new startups from local angel investors. We’ve seen a great increase in the number of angel investors in the Boulder and Denver area over the past seven years. Hopefully that trend will continue, as more people who have some wealth allocate a portion of it to making early stage investments in new, high risk, high potential startups.

While First Western Trust Bank (a local Boulder/Denver bank Amy and I work closely with and admire) is one of the sponsors, there is an additional cost to the event. If this was aimed at entrepreneurs, this wouldn’t be ok with me, but since it’s aimed at angel investors, I’m fine with it. In addition, the cost is really the cost of a normal lunch after the $30 discount to Feld Thoughts readers.  None of the money goes to me – it’s just to cover the cost of the event.

The details are below.

When: February 12, 2014 from 11:30am to 1:30pm
Where: The St. Julien in Downtown Boulder
Cost: $75 – Sign up by 1/27 and use the promo code “FELDTHOUGHTS” for a $30 discount. (Ticket sales go toward covering the cost of the event.)
Registration: Sign up

If you are an angel investor, or a potential angel investor and this interests you, I’ll see you there.

The 99 Investor Problem

Comments (59)

When the JOBS Act was finalized, one of the rule changes that had a lot of fanfare around it was the increase in the number of shareholders a private company could have. Prior to the JOBS Act, it was 500, after which point the company had to register and report to the SEC just like it was a public company (even if it hadn’t gone public.) This was a major issue for many fast growing companies that either went through strange contortions not to have 500 investors, or filed with the SEC to get no-action letters. There were plenty of nuances around this rule and I was in the middle of several situations that structured around it legally. Each time it was a lot of overhead for the company in question, none of which added anything to the system except fees to the lawyers.

Lifting the number of investors to 2000 seemed to make sense. In the situations I was involved in it would have immediately solved the specific problem. So that’s good.

But ever since we started working with AngelList on FG Angels, we’ve been wrestling with something called we’ve been referring to as the 99 Investor Problem. We structure our investment in companies via an LLC that has all the individual FG Angels syndicate members in it. This simplifies life for the company as they only end up with 1 investor – the FG Angels syndicate LCC – rather than a bunch of individual investors. At this point we have 217 backers in our syndicate, so with us each company would end up having 218 separate investors if we didn’t use the LLC.

If everyone was on the cap table, the company would have to chase down 218 signatures for everything. Instead, using our approach, they have effectively two investors – our FG Angels syndicate (one investor) and Foundry Group (another investor). Two signatures. Much easier. We handle the Foundry Group signature. AngelList handles the syndicate signature.

Except it doesn’t work that way. The SEC limits an LLC to having 99 investors. So we can only have 99 of the 217 syndicate members participate. Now, there’s a nuance that excludes “qualified purchasers” (QPs) – individuals with $5M in assets and firms with $25M in assets – from the 99 investor count. Overall our QPs + the top 99 investors in our syndicate represent $321,000 based on committed amounts to FG Angels. If you include the balance of the 237 members, we end up at a syndicate of $439,000. The company then gets our commitment of $50,000 on top of that.

As a result of this 99 investor limitation, we have two disappointing problems. First, we have over 100 investors who would like to invest in our syndicate with us who get excluded because of the 99 investor rule. Next, there is $118,000 per investment that we’d like to include in each syndicate that the companies we are investing in won’t get. Bad for the companies and bad for the investor.

We’ve spent lots of time over the past 60 days trying to solve the 99 investor problem. At this point, we’ve run into a dead end. We’ve tried multiple LLCs – that doesn’t work as they end up getting viewed as a single entity. We’ve tried other structures – that doesn’t work. We’re certainly open to ideas at this point.

In the mean time, until we solve this, AngelList is making the following changes to their Syndicates product.

- Qualified Purchasers: AngelList will include all Qualified Purchasers (individuals with $5M in assets and firms with $25M in assets) in each syndicated deal as they are exempt from the SEC’s 99-investor limit. We will soon email your backers to determine if they are Qualified Purchasers (QPs) and we will update your syndicate management interface to indicate the QPs.
- Top 99 Backers: The next time you syndicate a deal, we will include all QPs and the top 99 non-QPs by commitment amount. You can override this default to include specific backers who are not in the top 99. The top 99 backers will change dynamically as backers adjust their backing amounts.
- Funds: We are working on new funds products to allow additional investors who are not in your top 99 backers or QPs to participate in your syndicated deals.
- Notifying Backers: Finally, we will notify your backers of the SEC’s 99-investor restriction this week and give them the opportunity to change their backing amounts.

We are bummed about this because part of our goal is to build a very large angel network as a result of the FG Angels activity. The 99 investor rule directly undermines this, and limits the amount of investment and support for the companies we are investing in. It’s another example of the challenges of the JOBS Act and another discovery on our part of the “miss” between the goal of the new law and the implementation.

AngelList Accreditation Report

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One of the most annoying things about being an angel investor is filling out the same Accredited Investor Questionnaire over and over again. I’ve made about 200 angel investments and over 50 VC fund investments at this point since 1994 and I’ve filled out some version of this form at least 250 times.

A few weeks ago Fred Wilson made an open request for A Web Service For Qualified and Accredited Investors. He was referring to the form that used to be required under what is called “501″ that now goes by the friendly name 506(b). I doubt he has yet to fill out a form for 506(c), which is the new requirement for “general solicitation” under the JOBS Act. At least I hope he hasn’t, because there are a whole host of new and exciting issues with companies that use 506(c).

It’s incredibly annoying to fill out the same paperwork over and over again for each investment. So Fred’s request was timely and likely something on a lot of people’s minds – or at least mine.

And the gang at AngelList. They totally nailed it by releasing the AngelList Accreditation Report. It’s exactly what Fred wants and is another great example of how far ahead of the curve AngelList is. If you have no idea what AngelList is trying to accomplish overall, read the great article from this week’s BusinessWeek titled AngelList, the Social Network for Startups.

We’ve been working really closely with AngelList lately on our FG Angels initiative. We’ve completed one investment, have a second that should close this week, and a third that we are about to launch. We are settling into a tempo of about two a month and hope to be at four a month by Q2. We’ve had to do a lot of work – with AngelList – to get the documentation, legals, and workflow correct and appropriate for a fund like ours. But we feel like we are almost there.

The AngelList gang continues to be a joy to work with. And things like the AngelList Accreditation Report show that they’ve got a deep understanding of what is needed to truly democratize angel and seed investing.

AngelList Syndicate Update – Week 1

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We had a fascinating week trying to get everything figured out on our FG Angels initiative with AngelList. Our syndicate, which we are going to max out at $450,000, is currently right at $300,000 after one week. We are humbled by all the support and interest.

Geir Freysson, founder of Five Hundred Plus, did a super cool visualization of some of the top syndicates and how the participants in the syndicate relate to each other.

 

AngelList Syndicate Visualization

 

We’ve chosen our first deal to do. But we aren’t ready to pull the trigger yet – probably early next week. We’ve spent the last few days wrestling with some legal / compliance issues. The AngelList gang has been AWESOME to work with. We aren’t surprised that we are having to figure this stuff out – we knew the new JOBS Act rules, 506 compliance, and the ambiguity around a bunch of stuff would be problematic. Yeah – the problems are obscure ones generated by our government, and there are moments where it seems like the SEC simply doesn’t want any of this to actually work. But that’s part of the fun of it.

I continue to be mildly amused and amazed by the prognostications from the sidelines from a variety of folks (angels, angel groups, VCs, and entrepreneurs). Some of the strong opinions are based on virtually no data, or misinformation, or a complete lack of perspective. And others are based on a lack of understanding of dynamic systems. Either way, when asked, I continue to tell people our mantra – the best way to learn about stuff like this is to participate.

So – if you want to participate with us and learn a bunch in the process, join our syndicate.

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