If you are new to startup investing, chances are you have not heard about Angel Syndicates. An angel syndicate is a group of individuals who invest together in a startup. Pooling money from various investors helps syndicates write bigger cheques and negotiate better rights. If one person can invest $5K, 20 together can pool capital and invest $100K.
The person managing an angel syndicate is called a GP, and the members who invest capital are called LPs. Both the GP and LPs pool money to invest in startups, but the GP gets a share in profit from the entire investment. This profit share is called Carry.
Why does the GP get Carry?
GP does a lot of work in getting the best deals, analysing them, conducting due diligence, and negotiating rights with founders. For this effort, GP gets a share in the profits if the investment is successful. Syndicate GPs are like fund managers of Venture Capital or Private Equity funds. They make money if their investments do well.
Suppose a syndicate invests $100K in a deal. The GP invests $5K while the LPs together invest $95K. GP's carry in this deal is 20%.
If the startup fails, no one makes any money. This $100K investment becomes zero.
But what if the startup becomes successful and the syndicate makes a 10x return on investment?
Total return = $100K x 10 = $1M
Profit = $1M – $100K = $900K
As per the original agreement, the GP will take 20% of the profits.
GP's carry = $900K x 20% = $180K
The remaining $720K ($900K – $180K) will be distributed amongst LPs and the GP on a pro-rata basis. The investors will get their original $100K and $720K in return.
The GP is also one of the investors. He invested $5K out of this $100K.
GP's return on the $5K investment = $720K x (5/100) = $36K
If an LP had invested $15K in this deal, her return would be $108K ($720K x (15/100) = $108K).
GP makes money both through return on the investment and carry.
Investment = $5K
Return = $36K
Carry = $180K
The carry is much higher than the return on the investment. This carry depends upon the amount the syndicate invests in any deal. GP's carry increases with the syndicate's total investment.
If the total investment was $200K, GP's carry would also double – $360K.
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