In venture capital, Special Purpose Vehicles (SPVs) or Special Purpose Entities (SPEs) enable investors to pool their money to make a single, large, investment in a company. SPVs are structured as limited liability companies (LLCs) or limited partnerships. Both protect investors from personal liability in the event the invested entity is sued.
Investing in an SPV is fundamentally different to investing in a VC fund. The General Partners (GPs) of a VC fund raise capital to invest in multiple start-ups over the course of several years. By investing in the fund, investors (known as Limited Partners or “LPs” ) get exposure to a basket of different companies that comprise the fund’s portfolio.
The main difference between an SPV and a VC fund is that an SPV makes a single investment into just one company, while a fund makes several investments into multiple companies.
When an LP invests in an SPV, they become a member of the SPV and receive membership interest in the SPV. Income or losses are shared with members in proportion to each member’s ownership. This means that the LP is an investor in the SPV and the SPV is an investor in the company.
What does it cost to set up an SPV?
Setup fees vary based on the services selected. As a minimum, AngelList has a setup fee for most deals at $8k plus variable state regulatory fees ($1k - $4k). Each deal is set up as a separate SPV, so each deal incurs this cost.
What is the minimum I have to invest in each deal?
At least 2% of the allocation (or $10k, whichever is lower) to show skin-in-the-game to other investors. However, you are only required to invest $1k. The exception here is if you'd like to raise money from Canadian LPs, you must invest at least $10k or 2% of the allocation (whichever is lower).
You can invest directly into the SPV, or you can make an investment alongside (i.e. separate from) the SPV.
How many investors can participate in a SPV?
Are the deals private?
Each time you set up a deal, you can decide whether you'd like it to be private to your investor network. If you do, your deal will only be viewable to the investors you directly invite or those who back your SPV.
Who can invest in an SPV?
The requirements on who can invest in a SPV depend on the jurisdiction you are running your SPV in and the country of the target company.
For the US:
For Accredited investors. While it is possible to allow non-accredited investors to participate in an SPV, the reality is that the target investment company usually requires all potential investors to be accredited. This means that they require the SPV as a whole to be an accredited investor and the easiest way to achieve this is by having only accredited investors in the SPV.
For Other Countries:
For countries like UK or Germany there are different regulations on who who can invest in an SPV. You should check them before setting up an SPV.
Who is an accredited investor?
For the US:
An accredited investor is an individual or business that can trade securities but may not be registered with financial authorities. The SEC defines an accredited investor as either:
More on what an accredited investor is can be found on the SECs website.
Side Note: Just recently the SEC updated their requirements and added a new qualification option: "The amendments allow investors to qualify as accredited investors based on defined measures of professional knowledge, experience or certifications in addition to the existing tests for income or net worth."
For Other Countries:
For countries like UK or Germany there are different regulations on being an accredited investor. Make sure to check them before setting up the SPV.
How is pay distributed in relation to carried interest of a Syndicate Lead?
If $2m was raised with 20% carry and the company exits for $15m.
($15m-$2m) * 20% = $2.6m
So, $2.6m goes to the Syndicate Lead and the remaining $12.4m is sorted throughout the investors according to their membership interest.
How is membership interest determined?
Membership interest depends on the amount of capital raised collectively by the SPV and the capital you individually contributed.
What fees are associated with investing in an SPV?
Generally, fees can be grouped into the below buckets
Do investors have voting rights within the startup?
No, the investor invests in the SPV while the Syndicate Lead will be the only one directly involved with the startup.
What fees are associated with investing in a SPV?
SPVs can charge carried interest and management fees. Each SPV is unique with different waterfall provisions, hurdle rates, redemption rights, distribution timings, and more.
What are the risks of using an SPV?
In the past, we have had some really good experiences setting up our SPVs with Vauban.
Vauban offer SPVs, co-investment and fund vehicles for GPs at all stages of the journey- from the first syndicate to operating a billion-dollar venture fund. They take care of all your back-office so you can focus on finding the right deals & building investor relationships. Investors have raised over $2.5bn in global investments for companies including Revolut, Bolt and SpaceX on Vauban.
But here is also a list of other SPV providers that you can use for your deals.
You can find an overview of all the providers in our Infrastructure Category.
After covering all the basics of an SPV we also wanted to show you what it looks like to set up an SPV. This is what the process on Vauban looks like.
You can easily start to setup a new deal from your personal Dashboard in which you can also see all the deals that you are running at the moment.
In the next step you can decide in which jurisdiction you want to set up the SPV and if it should be a fund or a regular SPV. Depending on the deal you are running there are different products you can choose from. They mostly differ in the type of entity / structure that is used for the SPV.
After you have chosen the type of the SPV you need to fill in all information regarding the deal (e.g. deal terms, deal partners, deal constitution). The whole process of doing this only takes a few minutes.
After everything is set up you can start to invite investors by email, QR code, or a simple share link.
At any time you can track the status of your co-investors from the deal dashboard.
And this is what the final deal page looks like. As you can see, setting up an SPV on Vauban is really easy and straightforward. So if you are thinking of running a deal soon just try it out for yourself.
Despite limitations to investing through SPVs, they are a quick way to easily raise funds for a specific investment. They have low investment thresholds, making them more accessible to beginning angel investors and those with a lower net worth. SPVs keep the company cap table clean while ensuring that each investor gets the distributions they are entitled to, in case of a liquidation event. SPVs are versatile and their rising popularity reflects how useful they can be for investors.