Thread by @tylertringas

There's a growing quiver of tools for new fund managers to deploy innovative investment strategies, but it can be confusing for investors. Let's go over:
1/ rolling/subscription funds
2/ syndicates & SPVs
3/ crowdfunded GP equity

1/ rolling funds (from AngelList) or our own subscription fund allows Limited Partners (LPs) to invest into funds on a quarterly subscription rather than a big multi-year commitment. Here's our deep dive earnestcapital.com/quarterly-subs…

Investing in these funds means:
* you are an accredited investor
* you give the fund general parter (GP) discretion on where to invest
* you are providing the primary capital that goes into the invested companies
* you likely pay management fees to cover fund operations

Investing as an LP:
* is diversified across all the companies in that fund
* gets paid first. As soon as a company exits or (in our case) pays Shared Earnings, LPs get their proportional share
* is therefore typically the lowest risk of all these options

2/ Syndicates & SPVs (these are basically the same thing)
This is where a "syndicate lead" brings a specific deal for you to invest in directly: "we have a $500k allocation to invest in {company} and the min check is $10k" and you opt in to investing at whatever amount

Syndicates:
* allow you to choose which deals to participate in
* are not diversified, you're investing in one company
* do not pay management fees
* require active involvement (as an investor you should review and vet each deal individually)
* must be accredited

I primarily see syndicates being used 3 ways:
1/ to get started doing deals before raising your first fund
2/ to augment an investment that exceeds the fund's maximum check size (my primary reason for doing them)
3/ follow-on rounds for portfolio companies

Interlude: let's talk about "carry" or "carried interest" because it's an essential component of the crowdfunding deals.

The main way GPs make real money is on "carry." A typically structure with investors is "once I pay you back 1x your investment, I keep 20% of the upside"

Carry can be calculated either at the fund level (for LPs), so I have to pay back 1x the whole fund before carry kicks in, or at the deal level for syndicates, just have to pay back 1x what we invested in this one deal before carry.

Carry is a future streams of revenues that a GP can choose to share (or sell the rights to). In our case we carve out 20% of our total future carry across all funds to share with the team + earliest investors earnestcapital.com/profit-sharing…

Sometimes GPs will sell part of their future carry to private investors because while the amount of carry can become very large, it often takes *years* to start seeing carry checks since you have to pay back the whole fund first. Not super common, but happens.

Owning "X% of all future carry from all future funds" is basically like owning equity upside in the general partner (eg "GP equity"). Your upside = (a) they will continue to raise funds (b) those funds get larger over time (c) they generate good carry on all those funds

3/ GP Equity (& crowdfunding)
The arrangement above of buying into the GP equity is currently, legally the only way unaccredited investors can invest in funds via crowdfunding platforms and that's what we are proposing here 👇

https://twitter.com/tylertringas/status/1372392454649999361?s=20

GP Equity (via crowdfunding):
* does not require accredited investors
* is diversified across multiple funds & all deals therein
* is 100% contingent on the funds performing well (many VC funds never generate $1 of carry to share)
* has potentially more upside
* is the riskiest

Investing in GP equity is really like owning long-term upside in, ie @earnestcapital itself, not just our Fund 1 or Fund 2...and it's very aligned with the GP (ie me). If I win big, folks who own GP equity in me win big and vice versa.

But it is *not* the same, or the same risk profile, as investing into one of our funds where the odds of your investment going to zero are extremely low. It's more like investing in a startup where you're betting that our "funding calm companies" thesis will be BIG

Anyway, exciting times for new fund managers and investors alike and it's awesome to see so many investors getting into the business of backing entrepreneurs for the first time. Hope this helps!

PS - I'm optimistic that crowdfunding for unaccredited investors will eventually also allow the first type of investing as an LP in a specific fund but for legal reasons that baffle me, #3 is the only option for now.

Calls to action for investing via any of these @earnestcapital
A/ Unaccredited investors interested in type #3 GP equity should fill in this form to express interest: airtable.com/shrDoev78pTuLD…
B/ Accredited investors interested in #1 or #2 should start here earnestcapital.com/start/for-inve…

and ❤️ to @typefullyapp for making these threads a breeze to compose