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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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The 99 Investor Problem

Comments (58)

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.

Our First FG Angels Investment in OnTheGo Platforms Has Closed

Comments (18)

What better way to start off a new year than by closing a new investment. This morning we announced that we have closed a financing in OnTheGo Platforms via our FG Angels syndicate.

On October 1st, 2013 we announced that we’d be forming an AngelList syndicate called FG Angels and making 50 seed investments through AngelList by the end of 2014. We committed $2.5m from our Foundry Group funds for this effort and decided to max out the syndicate at $500k / investment, or $25m total. So $2.5m would come from us and $22.5m would come from syndicate participants.

We knew we had a lot to figure out around how the AngelList syndicate would actually work. We also knew that AngelList had a lot of work to do to get all the software and legal dynamics working properly. We’ve spent the last three months working with AngelList, our lawyers (Cooley), and a few other experts to make sure everything was set up the correct way. It was much more complicated than we expected, and we’ve learned a lot more about 506(b), 506(c), what the JOBS act made better, what the JOBS act made worse, and the general insanity of unscrambling new government regulations that purport to make thing easier, but actually make things harder.

But we’ve figured it out. And are psyched to have led a seed round in OTG Platforms. We’ve also got a healthy AngelList syndicate called FG Angels ready to roll. And we’ve got a second investment in the final stages of closing and a third one getting ready to launch. We expect to be in a 2 – 4 investment per month tempo for Q1.

The OTG Platforms gang has been incredibly patient with us. We were originally planning to announce things at the Defrag Conference in November but at the last minute realized that we’d blow all the 506(b) exemptions and generate a huge pile of work for everyone, so we held off until things closed. As we ran into issue after issue with the AngelList syndicate process and docs, they hung in there patiently as we worked it out, being willing to be the test case. They are just an awesome team – exactly the kind of people we love to work with.

The AngelList gang was equally amazing. We’ve loved what they are up to from the beginning. I’ve given Naval and Nivi lots of feedback over the years and have been active on a few non-tech angel investments through AngelList. We knew going in that the AngelList Syndicate process was a new thing and figuring out how to do it correctly, via a VC fund, was going to be a challenge. But we’ve mastered it and the AngelList team continues to be well ahead of the curve on all fronts.

Over time I’ll write more about what we’ve learned and what the issues are. But for now, congrats to OnTheGo Platforms – we are psyched to be partners with you. And thanks AngelList.

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