What is a pooling agreement?



An investor pooling agreement is a legal contract that allows multiple investors to pool their money together in order to invest in a startup company. This type of agreement is often used when a startup is seeking funding from multiple investors, but each investor is not willing to invest the full amount needed on their own, or in order to reduce the number of parties on the balance sheet of a startup in order to streamline communication and increase attractiveness for later stage investors.



Under an investor pooling agreement, the participating investors agree to contribute a certain amount of money to the investment pool. Once the pool is fully funded, the money is used to invest in the startup company. The participating investors then become co-investors in the startup and are entitled to a share of the profits or losses generated by the investment. They also agree to act together in all matters concerning their joint investment. To that end a pool leader is designated that represents the common will of the pooled investors towards the startup. 







Why enter into a pooling agreement?



One of the main benefits of an investor pooling agreement is that it allows smaller investors to participate in deals that they may not have been able to individually. For example, if a startup is seeking $1 million in funding and a particular investor only has $100,000 to invest, they may not be able to participate in the deal on their own. However, by joining with other investors to form an investment pool, that investor can contribute their $100,000 and still participate in the deal. 



A pooling agreement also reduces the management effort on the investor side as the pool leaders takes up the primary interface role with the startup, gathering information, keeping up-to-date with relevant developments at the startup and representing the common will towards the startup with the increased weight of the whole group's shares. It also makes investor communication more effective from the startup point of view, since the startup's management team can focus their communication on less counterparties (one pool leader instead of several investor's individually). 



Additionally, investor pooling agreements can help to diversify an investor's portfolio. By pooling their money with other investors, each investor is able to invest in a wider range of startups, reducing their exposure to any particular company or industry.







What types of pooling agreements are being used?



There are two main types of investor pooling agreements:





• Pooling vehicle: If the pooling members decide to create a separate entity to hold their investments a pooling vehicle is created. A pooling vehicle is a separate legal entity that investor's create or use to insert their funds into. The pooling vehicle in turn invests into the startup, effectively turning a number of individual investors into a single investor. The benefit of a pooling vehicle is that it allows all pool investments to formally being integrated into a single captable entry, which legally ensure that pool members act in unison and reduces the number of investors from the point of view of the startup. On the flip side, none of the individual investors has any direct shareholder rights towards the startup but needs to execute those indirectly through the pooling vehicle. Also, the pooling vehicle may be subject to further formal and reporting requirements that can also lead to increased efforts and costs. Therefore, a pooling vehicle is more suited for larger and more professional investments.  



• Pooling agreement: Investor groups with smaller joint investment volumes and seeking a higher level of personal investor engagement therefore can enter into a pooling agreement. A pooling agreement is an additional legal agreement between the group of investors entering into the pool that the pool members enter into typically in connection with a funding round. Investors typically agree to act jointly in all manners concerning their joint investment and the communication with the startup. Legally all investors are still individually invested in the target company, but their investments are mostly shown as an investor group on the cap table. Core benefits of a pooling agreement are that under a pooling agreement the individual investors retain their individual investor rights and that the agreement is quite flexible and incurs little additional cost. On the downside, from the perspective of the startup company there still are several investors that need to sign for formal occasions such as new investment rounds. 





Pooling agreements can also be undertaking by different groups of investors including syndicates, angel groups, and venture capital firms. A syndicate is a group of investors who come together to invest in a startup company:





• Syndicate members may be individuals, companies, or other organizations, and they typically pool their money together in order to invest in a particular company or industry.



• Angel groups are similar to syndicates, but they are typically made up of high-net-worth individuals who are willing to invest their own money in startup companies. These individuals are often referred to as "angel investors" and they typically provide both financial support and mentorship to the startups in which they invest.  



• Venture capital firms are professional investors who specialize in investing in startup companies. These firms typically have large pools of money that they use to invest in a wide range of startups, and they often have a team of professionals who provide support and guidance to the companies in which they invest.









What are typical terms of an investor pooling agreement?



Typical components of a pooling agreement include:





• Obligation to vote uniformly



• Procedural regulations



• Power of attorney to exercise



• Contractual penalties



• Termination provisions



• Succession clauses



• Arbitration clauses





In more detail: Pool members commit in the agreement to vote uniformly on all (or certain) resolutions at GmbH level. Procedural provisions (form, deadline, etc.) in the pool agreement ensure that a resolution is passed by the pool members on voting behavior in advance of the "actual" shareholders' meeting of the startup.



Frequently, the pool members authorize a spokesperson (e.g. the pool member with the strongest vote or the most experience) to implement the pool resolutions in the shareholders' meeting of the startup by exercising the voting rights of all pool members. It should be noted that such a power of attorney cannot prevent the exercise of the voting rights of a pool member in the shareholders' meeting/general meeting - in violation of the pool agreement. In particular, it is also inadmissible to grant irrevocable power of attorney. However, the shareholder bound by the pool regulations may be liable for damages if he votes on his own authority.



Voting pools usually also contain termination provisions, since a general exclusion of the right to ordinary termination is inadmissible. In practice, minimum terms of between 10 to 30 years are applied. The rights and obligations arising from a pool agreement are not linked to the shareholding in the startup entity, but directly to the person of the pool member. They therefore do not automatically pass to a legal successor together with the membership in the startup. In order to ensure that the pool is not dissolved by the death of one of its members but that the heirs take its place, a so-called continuation and succession clause is often adde to the pool agreement.







When does it make sense to create an investor pool?



Investor pooling typically is either initiated on the startup or the investor side. The startup may ask several investor to pool their stakes in order to group multiple smaller investors to reduce complexity and clean up the balance sheet. Investors may decide to invest in a pool if individual investors are investing funds below the minimum investment size or if they want to transfer the management of their joint investment to a trustee. An extreme case is a crowd-investing or crowd-funding where many investors (up >1000) enter into a pooling agreement, each investor only contributing a fraction of the total investment.







Links & resources regarding pooling agreements:



-  Structure & sample text of a pooling agreement  - from ContractsCounsel



-  Standard pooling agreement from the GESSI  (German Standard Setting Institute)