Investments on the Wefunder platform are managed in three ways:
- Direct - Managed by the company that you invested in
- Custodian - Managed by XX Investments, LLC (Most raises between May ‘20 and March ’21)
- SPV - Managed by Wefunder Admin, LLC or Wefunder Advisors, LLC (Most raises March '21 and after.)
Note: If a company uses a Custodian of SPV, it will be indicated in the legal disclosures in their Form C.
If your investment is a direct investment, the company you invested in manages your investment. This means that their team will take care of anything you would need regarding this investment. Although Wefunder isn't involved with the management of your investment, we are more than happy to help put you in contact with them should you need it.
A Custodian is an entity (such as a broker-dealer, bank, or transfer agent) that holds any securities on behalf of all investors (who are the "beneficial owners" of the securities).
This means investors do not possess the shares, convertible notes, or SAFEs. Instead, the Custodian holds them on their behalf. All securities' voting rights are delegated to the Lead Investor, who directs the Custodian on how to vote for the investor securities. The Custodian is the only entity listed on the cap table because it is the securities' record holder.
On Wefunder, XX Investments, LLC - an SEC-registered transfer agent - acts as the Custodian for all securities sold on the platform that use the Custodian structure.
Using a Custodian increases the quality of startups that use Wefunder while giving investors more voting power on Wefunder.
With a Custodian, higher-quality startups with other fundraising options are more willing to use Wefunder. Startups use a Custodian to ensure their follow-on financing won't be at risk. Venture capitalists are uncomfortable when startups have many small investors directly on the cap table (they don't like collecting thousands of signatures). With a Custodian, one entity on the cap table represents all those smaller investors: XX Investments, LLC.
Before Custodians, almost no companies that crowdfunded offered voting rights to their investors. Now, all voting rights are held by the Custodian, which must vote as directed by the Lead Investor.
To ease the logistical burden for founders and solve problems with having too many stockholders on the cap table, we are now using special-purpose vehicles (SPVs) for most new Community Rounds. This means we'll set up an LLC for the sole purpose of investing in each startup. All investors pool their capital into the SPV, which invests in the company as one entity. If there are early bird terms, a separate SPV will be set up to hold the early bird investors.
We'll set up these SPVs at no extra charge to companies or investors.
Startups use SPVs to ensure their future growth and follow-on financings won’t be at risk. Having too many individual stockholders can make venture capitalists skeptical, require companies to go public before they're ready, and make gathering stockholder approvals a challenge.
With an SPV, founders can have unlimited smaller investors grouped into one large entity, with voting power directed by a Lead Investor.
For most new SPVs, the manager is Wefunder Admin, LLC, who then delegates voting decisions to the Lead Investor.
For legacy Reg D SPVs and those set up for certain purposes, such as investing in follow-on financings, the manager is Wefunder Advisors, LLC.
The manager of the relevant SPV is indicated in the Subscription Agreement that investors sign when they invest through an SPV.
For more info on how SPVs solve some tricky legal issues in structuring investments, see here.