The end of "Investors are like martinis, one is good, two is better, three is a nightmare ..."

With the number of angels on the rise, investors are finding themselves funding a company alongside dozens of co-investors.  These rounds are becoming quite attractive for companies, because a large number of investors translates into access to greater networks and connections. Additionally, entrepreneurs can retain greater control because there are so many investors, each with a small piece of the pie.  Yet because each investor owns such a small share, there is a danger of experiencing the tragedy of the commons - no one is incentivized to take the lead in investing time and effort into the company, or worse, everyone wants to take the lead!

In her article "'Headless Rounds Ride into Town, Helped by Kevin Rose," Connie Loizos of PEHub observes that these large syndicate rounds may not be suitable for companies that need a lot of guidance from their VC investors or those that have concerns with leakage of proprietary information.

At Goodwin Procter, we have seen a number of financing rounds with double-digit investors.  One of our clients had over 30 investors in its Series A and similar numbers for its Series B and Series C rounds.  These large numbers do make the financings a bit more logistically difficult, but our client has been able to keep its investors engaged and involved and still protect its proprietary information through careful attention to the various thresholds required to take corporate action and an active and galvanizing management team.

Regardless of the number of investors, it is important to have a law firm that can assist in establishing procedures and agreements to protect your company's IP, keeping the financing rounds organized and productive, setting fair and reasonable terms that will keep investors engaged, and finding investors who will work well with the entrepreneurs to create a successful business.  These so-called headless rounds have worked well for a number of our clients, but since there is no one-size-fits-all solution, if you have questions, you should consult with other founders who have experience with angel investors, and we would, of course, be happy to discuss with you as well.

This post on Financing Strategies and Company Financings was authored by Jennifer Fang.

 
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