What exactly is an SPV?
- A single-purpose corporate entity (typically an LLC) owned by a group of investors
- Formed for the specific purpose of investing in one particular startup
- Each SPV investor signs an Operating Agreement, Private Placement Memorandum, and Subscription Agreement with the SPV organizer
- Each SPV has its own separate bank account and EIN, and files separate tax returns and investor K-1s
- The SPV is terminated once the underlying asset has been distributed to investors.
Benefits of SPVs
It all comes down to flexibility and fees:
- Lower minimum investment amounts: SPVs allow investors to pool their investments and act as one group. Individual angels do not need to meet a company’s minimum investment threshold (often $25,000 or higher) on their own. Rather, the SPV, acting as a collective entity, needs to meet the minimum. This allows individuals to write smaller checks and build a diversified portfolio more inexpensively.
- More investment control: SPVs, similar to direct angel investing, allow investors to support companies and teams that align with their individual investment strategy and values. In a venture capital fund, the fund manager chooses what to invest in.
- Founder friendly: SPVs are a great tool to help founders keep their capitalization tables (“cap tables”) clean and tidy. As an example, instead of 10 angels listed separately on a cap table at $10K each, an SPV would represent one line for $100K.
- Lower fees: SPV models may also mean lower fees for investors. In a traditional venture capital fund, the investor typically pays management fees of 2 percent annually over the multi-year life of the fund. With many SPV models, the management fee is paid only once (up front at the time of the investment) – representing an opportunity for significant savings.
- Lower barriers to set up: Traditional venture capital funds require significant legal and accounting fees to get structured and formed. Platforms and services like Sydecar or WeFunder’s new product Capitalize help simplify the process of administering an SPV.
Each investment model will have a different structure and terms. Be sure to do your homework to understand the fee structures before making any investment.
Considerations of SPVs
- Direct influence: Investors are not included individually on the startup’s cap table – the SPV entity is – so individual investors may have reduced control and access to the founder and company.
- Intentional diversification: Each SPV invests in a single company, unlike a traditional venture capital fund, which holds a pool of investments. To diversify their early-stage investment exposure, investors will often take a portfolio approach by investing in multiple SPVs.
- Know your organizer: It’s important to get to know the team that is organizing the SPV and sponsoring the investment opportunities. Here are some questions you should ask: How much of their own money are they investing in each deal? What are their areas of expertise? How thorough is their due diligence and research? What is their track record? What are the management fees? Is there carried interest payable on future investment profits?
How does it actually work?
SPVs are quite flexible, which also means the models vary in their own unique ways:
- Many SPV models utilize an online platform that handles SPV administration services, including banking, tax filings, compliance, and accounting functions.
- The SPV organizer serves as the point of contact between the startup and the SPV investors, distributing company and investment information and reports.
- The SPV organizer may also represent the group of SPV investors by serving on the board of directors of the company, or by acting as a board observer.
In summary, SPVs provide investors another way to participate in early-stage investing. The flexibility and other benefits are a great way for newer investors to learn while making smaller investments in a broader selection of diversified companies. SPVs can also be attractive for investors who might want to align investments with financial liquidity events, allowing cash to be deployed when available, rather than waiting on capital calls that can arrive at inopportune times.