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- Beware of the Roll-Up Vehicle
Beware of the Roll-Up Vehicle
a newsletter about VC syndicates
Alex Pattis & Zachary Ginsburg
May 22, 2024
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Beware of the Roll-Up Vehicle
Guest post by Jenny Fielding of Everywhere Ventures
This week, Last Money In is excited to share a guest post from one of our colleagues Jenny Fielding, who founded and leads Everywhere Ventures. In 2024, Last Money In decided it would be to the great benefit of readers to have five to ten thought leaders from around the Syndicate/Emerging Fund GP ecosystem write a post sharing a unique perspective on an SPV related topic (and with no editorial overview from our end - we want all participating guest authors to write on a topic that speaks to them).
More on Everywhere Ventures: Jenny Fielding is the co-founder and Managing Partner of Everywhere Ventures (formerly known as The Fund), a global venture capital firm backed by a community of over 500 founders and operators. She has extensive experience as an investor, having been the first institutional investor in over 300 tech-enabled companies across various sectors, with a focus on fintech, healthcare, and the future of work. Prior to co-founding Everywhere Ventures in 2018, Fielding spent 7.5 years as the Managing Director at Techstars, where she led investments into companies that now have a combined market capitalization of over $10 billion.
Given Jenny’s extensive experience across models (SPVs/Funds) and having seen the evolution of the ecosystem over the last ~10 years, Jenny has kindly offered to share her unique perspective with Last Money In readers today.
In this post, Jenny is deep diving on a major drawback and conflict of interest related to Roll-Up Vehicles (RUVs), a newly popularized structure for founders to easily raise money from up to 250 accredited investors through a single vehicle on their cap table. Candidly, I’ve seen many founders raise via roll-ups and sadly never considered the potential major problems arising from this conflict of interest, so I’m excited to have Jenny on to share her experience with readers today.
Now onto Jenny’s post…
I got screwed investing into an RUV - and it was entirely my fault!
I’ve been a long time investor and manager of Special Purpose Vehicles (SPVs) and a fan of the structure and access that they can provide. As an angel, I’ve been able to invest into amazing pre-IPO companies that I never would have had direct access to and as part of my fund, Everywhere Ventures, I am able to keep our fund size small by sharing our follow-on pro-rata with other investors via our Angellist syndicate. In fact, we manage upwards of 100 SPVs!
When I first learned about Roll-Up Vehicles (RUVs), I was excited to see the same level of convenience, ease and access that I experienced investing in and managing SPVs extended to founders.
How it works is that founders get their own private SPV that allows up to 250 accredited investors (think small angels, operators, micro-funds) to invest into one vehicle that takes up just one line-item on the cap table. Founders don't need to worry about hiring lawyers for the RUV formation or tracking down investor accreditation and KYC or dealing with signatures and wires - that's all part of the RUV package. Bingo!
Back when I was a founder, I had to worry about having too many small investors on the cap table and even had to turn away a few super strategic angels because of the added legal costs and cap table complexity of accepting too many small checks.
An often overlooked issue is that a manager of an SPV or RUV, has a fiduciary responsibility to the members of that vehicle. They need to make decisions on their behalf and often there are conflicting agendas. Managing SPVs, I've felt the weight of those conflicts myself. And that's the rub for the founders running RUVs. The founder managing the entity needs to be both a fiduciary to the members of the RUV as well as to the company and there are times where those groups are not aligned.
The most obvious misalignment is around pro-rata rights. Here’s the situation that I recently found myself in… I was a small investor in a pre-seed RUV deal administered by the founder of the company. The RUV included pro-rata rights. A year later, as a competitive seed round came together, it became clear that there just wasn’t enough allocation for every investor that wanted to invest. So instead of honoring the RUV’s pro-rata rights, the founder waived those rights as he was entitled to do as manager of the RUV. The founder never consulted with any of the investors in the RUV and stopped responding when we (and other pre-seed investors) tried to contact him to discuss. Ugh.
Needless to say, I was pretty upset when I found out what had happened. I was extremely disappointed in the founder for breaching his fiduciary duty to the members of the RUV and angry that he’d treat his first believers that way. Ultimately, I was most annoyed at myself for taking a shortcut when I invested and not educating myself properly on the mechanics of the RUV.
And pro-rata rights are just the tip of the iceberg - in future rounds, the founder could make other decisions on behalf of the RUV around pay-to-plays and other follow-on scenarios. This could significantly impact the RUV members and even wipe out their interests entirely in the case of a pay-to-play where the founder does not contribute the minimum share on behalf of the RUV. As an investor in the RUV, you will have no recourse for any of these decisions and are beholden to the decisions made by the founder.
Despite everything you’ve read thus far, there are clear benefits of using an RUV if you're a founder and I totally get why many would want to use them. My advice: if you're a founder considering an RUV, take the extra step to ensure that the RUV members are fully aware of any potential (inherent) conflicts and be clear about how you plan to make decisions on behalf of the RUV. But of course, the real burden is on the RUV members, the investors, to be smart, read the docs and always get up to speed about any investment vehicles you are considering investing into.
If you enjoyed this article, feel free to review our prior articles from Guest GPs:
Last Money in is Powered by Sydecar
Sydecar empowers syndicate leads to manage their investments more effectively. Organize, manage, and engage your investor network effortlessly with Sydecar’s management and communication tools. Their platform also automates banking, compliance, contracts, tax, and reporting, freeing up syndicate leads to focus on securing deals and strengthening investor relations. Elevate your syndicate operations with Sydecar.
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