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How to allocate proposals if the syndicate is overfunded?

How to allocate proposals if the syndicate is overfunded?

Last updated on May 10, 2024

There can be some occasions where investment offers receive more indications than they are able to offer. This is referred to as “overfunding” or “oversubscription”.

The allocation decision (i.e. what to do when the fundraising company receives more indications than it needs to accept) is made by the company alone.

We encourage companies to communicate their decision to their investors.

Examples of previous allocation decisions

Accept all indications

A company is free to make an offer to accept the full value of all indications, even if it is more than its target.

Pros: All investors have the full amount of their indications accepted.

Cons: By accepting all indications, the company may raise more than its target and dilute the cap table more than intended.

Accept all indications on a pro-rata basis

A company may decide to make an offer to take in all the people who indicated, but crucially, the offers will be in proportion to the amount the company needs. So, for example, if the company wants to accept a maximum of €1,000,000 but the total indications were €2,000,000, the company may decide to send out investment proposals for 50% of the total value of each and every indication that was made.

Pros: Allows the company to manage the amount raised so that cap table dilution targets are not exceeded.

Cons: Some investors may not like the fact that they will not receive the full amount of their indication.

Accept indications on a “first-come, first-served” basis

A company may decide that proposals will be offered in full to the investors based on the order in which they indicated until the company reaches its target investment amount. Therefore, the company may decide not to make any offers to those who invested after the maximum amount was reached.

Pros: Can create interest and momentum in an investment offer.

Cons: Can be difficult to manage and can greatly increase the payment period of the investment offer, eventually leading to a delay in the funds raised transferred to the company.

Accept indications using a mixture of the above methods

A company may decide to make investment proposals based on a mixture of the pro-rata and first-come, first-served methods. For example, it may offer the full amount indicated for all of those who indicated up to 50% of the maximum on a first-come, first served basis, and thereafter, make a pro-rata allocation. Or some other mixture that the company chooses.

Pros: Allows the company to manage the amount raised so that cap table dilution targets are not exceeded.

Cons: Using a mixture approach can increase the difficulty of the investment calculations necessary to prepare the final proposals.

Accept indications using other methods

Each company has its unique history, stakeholders and opinions and these differences can result in unique decision making. It is possible for companies to choose a completely new allocation method. That is the company’s choice, whether that is giving preference to:

  • smaller tickets so that the company has as many different investors as possible;
  • larger tickets so that the company has as few investors as possible;
  • indications from people who fit a profile that the company is targeting as new customers;
  • indications from existing customers; or
  • in alphabetical order!

When deciding upon an allocation method, it is important to consider:

  • your target raise;
  • your cap dilution targets;
  • your ability to manage the administration of the method chosen;
  • your ability to calculate the investment amount necessary for proposals;
  • how soon do you need the raised funds transferred?; what is your runway?
  • do you have the luxury of experiencing a prolonged payment period?

Unacceptable allocation decisions

While Funderbeam respects companies’ decisions as to who may become a part of their business, we are committed to promoting equality and respect for all. Although we have limited power to interfere in a company’s internal decision making, we believe it is unacceptable for a Funderbeam client to be unfairly treated less favourably for any of these reasons:

  • sex;
  • gender reassignment;
  • marriage and civil partnership;
  • pregnancy and maternity;
  • race (including ethnic origin, colour, nationality and national origin);
  • disability;
  • sexual orientation;
  • religion and/or belief; or
  • age.

Sometimes a company will have a legitimate reason that is related to one of these factors and that reason must be taken into account.

However, please contact us if you believe that a company has made an unacceptable allocation decision on one of the above grounds. We will investigate your concern and take appropriate action as far as reasonably practicable.

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