Syndications . . .
are venture investments that are shared among several
investors, with each providing part of the total funding to the
company. Syndications are popular among venture investors because they
allow them to spread their money over more deals and diversify their
risks. They also allow them to share information with other investors.
Sometimes an investor who is willing to invest part of
the money is not willing to put together the syndicate necessary to
provide the rest. Such an investor is less attractive to a company
than one who is willing to help find all the capital a company needs.
A good question to ask any interested venture capitalist is whether he
is able to provide all the funding needed by the company. If not, ask
if he will syndicate the investment. Most established funds will do
A problem that sometimes accompanies a syndicated
funding is the desire of each investor to have a seat on the company’s
board of directors. As a rule, management should try to limit its
outside investor group to the same number of board seats management
would have given one investor had he provided all of the funding.
Usually, this means one or two board seats for the investor group with
the investors choosing among themselves who will represent them on the
board. Others may attend board meetings and consult with management,
but only the ones serving on the board will be entitled to vote.
This encourages the syndications’
members to cooperate among themselves so that management is not
distracted by disagreements among its investors. At the same time, it
preserves a small working board of directors and gives management the
ability to tap into the expertise and contacts of each investor. See: