See Part 1
Founders use syndicate leads and fund managers to raise capital. These intermediaries charge either 2/20 or 0/20. An employee can act as a syndicate lead. If founders do not need intermediaries, there is no place for the employee as a syndicate lead. The new Roll-Up Vehicle (RUV) is a no-carry SPV that the startup leads. It eliminates the need for intermediaries. I have invested in third-party SPVs and RUVs across multiple platforms. I have also observed deal flow across many syndicates and fund managers. I am confident that within 1 year, most founders will use RUVs to fundraise.
Two things that make RUVs even more attractive than raising from intermediaries.
The startup can generally solicit investment into the RUV
The company can allow secondary trading of RUV interests which may work without affecting 409a valuations.
Benefits
CEO
Only coordinate one wire from fund admin and one new entity on the company’s cap table.
Can justify higher valuation/cap due to no carry, significantly reducing dilution over multiple fundraises.
Direct communication with end investors
Regulatory overhead is the same as traditional Reg D 506b offerings. RUVs are currently only open to accredited investors.
The low cost of RUVs ($~10k) and admin ease can enable CEOs to raise as often as every quarter.
Raising in smaller batches can reduce dilution. As a result, there is less likelihood of over-raising.
The CEO can leverage their personal audience/community, especially if they build public as an Embedded Entrepreneur. They can also use the company's Go-To-Market infrastructure for marketing the offering.
If secondary trading is workable without onerous restrictions re holding periods, etc.
The CEO can use data on secondary trading of RUV interests to price new equity or SAFE rounds. However, letting the market set the price instead of a small group of fund managers and/or syndicate leads eliminates one of the largest value adds most intermediaries bring: valuation guidance.
Secondary trading of RUV interests would likely not affect 409a valuation
Investors (LPs)
No carry paid to fund manager or syndicate lead
Can communicate directly with the CEO for questions, diligence, investor updates, etc.
Investing retirement account assets (using AltoIRA) into a RUV is simple. Once onboarded with an SPV admin, an investor can invest in many deals with no hassle.
Performance calculations are much more straightforward. No investor fees or carry means paid-in capital is equal to invested capital. Gross and net performance metrics like TVPI, IRR, etc., are now the same since the startups cover the SPV formation fees.
General solicitation makes it easy to find startups raising through RUV, eliminating the deal-flow value add of intermediaries.
Secondary trading can be costless and straightforward because the SPV interests are a 1-1 representation of the underlying shares.
Fund administration platforms
CEOs can start a deal without having to wait on a syndicate lead or fund manager. Faster deal velocity translates into more admin revenue.
Can earn capital introduction revenue by surfacing RUVs to onboarded investors
Can reduce SPV prices while maintaining margins due to not having to manage
Carry assignment agreements
Pro-rata admin costs for each investor.
A relationship with a syndicate lead or fund manager for each deal
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