Updated: Apr 19, 2022
For startup founders and angel investors, Special Purpose Vehicles (SPVs) can provide a convenient investment structure. In our last blog post, we discussed how SPVs are legal entities that allow investors to pool smaller individual contributions into a single, larger investment in a startup.
In this blog post, we share key information about the pros and cons of creating SPVs for startup founders.
The SPV investing structure is becoming more common in startup financing. In most cases, the SPV is set up as a holding company, registered as a Limited Liability Company (LLC). The SPV holding company is usually designed to make a single investment in the startup. Funds are collected from individual investors into the SPV and are then invested collectively. In this model, the SPV becomes the investor in that startup instead of the individual investors.
For startups, there are several benefits to accepting investment via the SPV investment model:
Organize your investors: Rather than managing a number of smaller investors, the SPV structure allows founders to get a single, usually larger, investment from an unlimited number of investors in the SPV. Since the SPV model usually includes a manager who leads the SPV, a startup founder has the opportunity to liaise with the lead investor or manager of the entire SPV, instead of every investor involved.
One line on the cap table: The above management also applies to your cap table. You are able to accept smaller checks from a number of investors while maintaining a clean cap table as the SPV shows up as a single investor. Having multiple small investors and investments in your startup may also help when raising from larger investors in later rounds. The SPV structure stabilizes the number of investors in your startup.
Move faster: The process to get investors to invest in your startup can be lengthy. In the SPV model, investors are aligned and prepared to invest. Once the structure is in place, the investment follows quickly.
Be more inclusive. Your existing angel investor might want to give your startup more money, but may not have the funds themselves to invest. High-wealth investors can raise funds via the SPV and potentially even lead a round that would otherwise be too large for them.
Go global. SPVs allow foreign investors to avoid investment limitations they might face on their own. Since the legal structure of the SPV is technically registered in the U.S. as an LLC, investors can own or invest in U.S.- and globally-based companies. Tax and legal considerations are managed by the investors in the SPV.
While there are many benefits to accepting SPV investments in your startup, there are a few things to be aware of before you add the SPV to your cap table.
Know Before You Grow:
Limited connections. While working with one SPV manager helps startup founders limit the administrative load of managing multiple investors, the structure may also limit founders’ ability to connect with multiple investors which could have implications for future fundraising.
Additional Expense. If a founder initiates the SPV, there will be added costs for creation, taxes, maintenance and management of the vehicle. While the funds a startup is able to bring in will usually offset these costs, it’s important to be prepared for them upfront and through the lifecycle of the SPV.
Management. Because the SPV is technically a company, if the founder initiates the SPV process, there is additional operational management of that company. Having a manager, like Fundr, can help with the long term maintenance.
The SPV model can help startups gain the investment they need to succeed. The key is to measure the opportunity against your business’ specific needs before moving forward.
Stay tuned for more information on Fundr’s SPV investment vehicle!