I'm surprised there isn't more literature out there about the use of roll-up vehicles.

Without a good walkthrough of what they are, how much PAIN founders could avoid by using them, and some strategic advantages, I would expect very few first-time fundraisers to use them. And that’s a shame.

Let’s fix that.

What is a Roll-Up Vehicle?

An RUV is essentially an SPV (Special Purpose Vehicle) that allows multiple investors to invest into an entity within one vehicle. All investments are bundled into one check that occupies just one line item in the cap table.

Especially at the earliest stages, when many founders rely on small checks from angel investors, friends and family, etc. a roll-up vehicle (abbreviated as RUV and sometimes called a cap table vehicle) can be a big help.

Cost of Roll-Up Vehicles

Bear in mind, setting up an RUV isn’t free. They typically cost around $8,000 to create, which might feel hefty, especially if you haven’t started collecting money and your first check might amount to something as low as $5,000. Even in the off chance that founders do hear about the idea of using a RUV, they can be scared off by the initial costs.

Let’s get you more comfortable with RUVs, starting with the key reasons why they could be so helpful at your earliest stages

Value of RUVs before the first investment

Administrative Overhead

If you haven’t raised before, you probably don’t know how much administrative overhead is involved in collecting checks from angel investors. The paperwork, signing of documents, and wiring of capital can either be handled by a lawyer (who'd charge you by the hour) or by you and your team, both of which can be distracting and time-consuming.

Even if you’re willing to put the time and effort into that, juggling so many steps can make it an agonizingly slow process to close certain investors. In fundraising, speed and momentum are key.

Note: If you're scared about committing close to $10,000 to set up an RUV before you even have an angel ready to cover that, have your initial conversations with angels first. When it finally seems like they are leaning in and there is an amount that covers that cost, you can wait til then to spend the money to set up the vehicle.  

Increased Credibility

Another advantage to the RUV is that it gives your angel fundraise a semblance of gravitas and formality, helping an angel feel like there's been interest and due diligence in the investment before they commit.

There’s a night and day difference between saying “Hey, we’d like to do this investment at x__ valuation cap, would you please invest? We can send you the paperwork” vs. “We are collecting checks from angels right now. Our terms are set within this RUV. We have already funded x__ checks. Here is the link to complete your investment, please do so by x__ date.”

This makes a huge impact on getting those checks over the line, and the hassle of getting angel investors the right routing numbers and bank account information to let them send funds is a headache worth spending money to get rid of.

Value of RUVs after the first investment

Once you've collected the money from Angels and invested it into your company within the RUV, you might think you’ve exhausted the value. It can be hard to see the future benefits of having a RUV in place especially if you haven't been in this situation before.

Investor Consent

You'll frequently need your investors to give consent throughout the life of your company. One major situation is when you're raising additional rounds of capital. If you have 10+ angel investors, getting each one to sign off can be a nightmare. Having all your investors under one line item in your cap table makes this process much smoother.

We're not even talking about investors who are explicitly trying to hold up the deal because they don’t like it. We're talking about that rich uncle who spends all their time on the beach and might not check email all the time, accidentally holding up your fundraise.  

Cleaner Cap Table

As you go through future fundraises where potential investors may ask to review your cap table, it helps not having random individuals that might trigger warning flags and jeopardize a deal.

I've seen people review cap tables and say, ‘Why is this person on the cap table? How are they involved? How much influence do they have?” There are endless reasons why people can get upset at individual investors. Even with a small check being involved, it's less risky and easier to have them all under one entity in your cap table rather than listing out every individual investor.

Flexibility if a Formal Fundraise Doesn't Materialize

I’ve seen situations where founders start collecting Angel checks in a RUV while also doing a formal raise with institutional VCs and trying to find a lead investor. Angels can fund the RUV knowing that their money won’t formally be put into the company until the full deal closes. But if the deal doesn’t come together and the founder can’t land a lead, they are then able to go to all the angels and say “Hey, we're actually changing the deal. It's going to look like x__, it's going to be a bit smaller. You're welcome to pull out if you want, but we're excited about this round and if you're still in, we're going to include this investment in the round.”

Unexpected Advantages of RUVs

Once you have an RUV in place, you will probably be way more open to accepting almost any investor, no matter how small their check.

$1,000 from a product manager could be extremely valuable because of the credibility they might bring to your company. On its own, $1,000 would actually be a net negative- it would cost more to set that up as an individual investment than as part of an RUV.

Once you've decided to commit the money to setting up an RUV, you can be much more aggressive in soliciting angel checks than you might be if you were only going to do a couple and have your minimum check size be more something along the lines of $25k.

The administrative efficiencies are a huge benefit especially for bootstrapped companies- being able to just send someone a link that explains the terms and easily lets them invest.

The larger value of an RUV is akin to insurance - I've seen situations where a founder could have avoided a big headache if they had used a RUV.

How do RUVs affect investor sentiment?

It may seem minimal, but any signs that show a founder is sophisticated and is setting themselves up for easier future fundraises can make an investor more interested.

When I was fundraising, I would go into conversations with VCs and ask certain questions that had multiple investors who didn’t know me beforehand asking me if I was a VC before. They knew immediately they were dealing with someone who understood the game and that made a difference in leveling the playing field during negotiations.

Key Takeaways:

1. Roll-up vehicles offer efficiency by consolidating multiple investments under one entity. They reduces administrative overhead, which can speed up the investment process.
2. The initial cost might seem high, but it evens out with an increase in the number of checks from angel investors.
3. RUVs add credibility to your fundraising efforts and can make the investment process more appealing to angel investors.
4. Having a RUV set up smoothens investor consent processes and keeps your cap table clean and less likely to trigger warning flags with future investors.
5. A RUV can serve as insurance against possible future disruptions and can positively signal to potential investors about your planning and organizational skills.

Be chased,
Jason