How start-ups find access to professional investors thanks to subsequent syndication

Financing phases of start-ups

A start-up company typically goes through several financing phases: At the beginning, the founders bring in the initial capital. The first growth is then often made possible by so-called FFF financing, i.e. by family, friends and "fools". At some point in this phase, ambitious start-ups are also joined by business angels. Only with more mature start-ups do institutional investors such as venture capitalists invest. By this time, there are easily 15 to 30 shareholders in the share register. In the case of start-ups that have financed themselves via crowd equity platforms, however, there may well be 200 or more shareholders. 

Widely held shares make it difficult for start-ups to access professional investors

It is precisely this large number of shareholders that is a thorn in the eye of venture capitalists. The right of each and every one of these shareholders to have a say and co-determination has a deterrent effect on venture capitalists, especially in connection with capital increases or exits. This is because the more participants there are in a discussion, the more difficult it is to reach a consensus or agreement. Small shareholders also have limited voting power and thus influence: to compensate for this, some of them may try to increase their influence by opposing and blocking formal procedures. Professional investors, however, lack the time and resources to negotiate with a large number of small shareholders for weeks or even months to reach agreement on important or even urgent landmark resolutions. Startups with many small investors and a fragmented share register therefore often make the painful experience that professional investors quickly lose interest in funding: "Some of the big VCs pulled out when they saw our long shareholder list," says Mine Uranco-founder of Alver World SA, an impact startup with formerly 32 shareholders. She continues: "VCs are more likely to start due diligence with startups that have a consolidated share register. This doesn't affect the valuations of the startups, but as fewer VCs are willing to deal with long lists of shareholders, the choice [of interested VCs] is limited."

The benefit of investor pools 

Start-ups thus have a great interest in combining existing shareholders in a pool and thereby consolidating the share register.    

But private investors can also benefit from a pool: On the one hand, they can pool their financial power and participate in a financing round that would exceed the possibilities of each individual. Furthermore, the pool also gives them the opportunity to organise themselves and to bundle their voting power.  

The benefits of a pool are thus obvious to investors and the company seeking capital, and the procedure for doing so before the small investors invest is conceivably simple. Therefore, the motivation of the investors concerned to set up and join a pool is also very high. 

In the case of subsequent syndication, however, a little more tact and persuasion is required: shareholders who are already accustomed to demanding information and insight directly and individually from the founders and to being able to participate directly in the general meeting and pass resolutions are not readily prepared to give up these privileges. In addition, from the point of view of stock corporate law, it is not at all possible to forcibly deprive shareholders of their individual shareholder rights (inspection, participation, co-determination). 

The Konsento solution

In order to convince small shareholders to join a shareholder pool and open the way for investments by professional investors, a whole bouquet of incentives is needed. However, these must not run counter to the interests of the start-up, its founders and the VCs. For this reason, the design of a subsequently established shareholder pool must, on the one hand, provide for sophisticated contractual information, participation and protection rights of the individual small shareholders and, on the other hand, provide efficient and effective instruments for their implementation in practice.  

Konsento has further developed the SISAT Framework together with lawyers of start-ups and small shareholders in order to make subsequent syndication attractive also for investors who held a direct shareholder position due to a previous investment. Furthermore, Konsento provides both startups and their shareholders with the technical tools to organise themselves in a simple and intuitive way, so that they can still exercise their shareholder rights as if they were directly registered in the share register. And Konsento's cooperation with professional minority representatives ensures that minority shareholders in an investor pool do not have to do any extra work compared to direct participation in the startup. 
We are happy to advise start-ups and venture investors on how previous investors can best be combined in a pool: hello@konsento.ch

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