The most comprehensive guide on startup investment with an SPV.
SPVs or Syndicates can be very flexible and affordable, making startup funding effortless and accessible for accredited investors. With so many Startups looking for early-stage investment and investors looking to fund a Startup via a deal-by-deal model, SPVs are in high demand.
To help you get started, I am sharing the role of SPVs in the Startup ecosystem and how it is making a difference. You will also find out how SPV works. SPV Hub is a digital platform simplifying the creation of an SPV. By the end of this article, you will also learn the working of an SPV at SPV Hub.
What is an SPV?
As a refresher, SPVs are legal entities that are created with one special purpose. In the Startup ecosystem, the special purpose is to invest in the single chosen Startup. Unlike traditional funds, an SPV allows an investor to make a small contribution and avoid a large commitment. It is a legal arrangement for startup investors to come together and invest directly in the selected Startup.
SPVs have been around the corner serving their purpose for a few decades. These investment purpose legal entities gained recognition in the Startup ecosystem a few years ago due to their potential advantages. In the world of Startup investment, the SPVs are known as Syndicates. Click here to learn why SPVs and Startups are a pair made in heaven and why syndicates are the ideal funding structures to pool capital in the private investment landscape.
SPVs: The Missing Piece of the Puzzle
There are several mediums of raising funding for Startups – Venture capital, convertible notes, SAFEs, and venture debt, to name a few. Despite their availability, there was a need for a fundraising structure allowing investors to get direct access to selected startup deals. If an investor plans to invest directly in a private company, the starting amount of investment is around USD 50,000 or higher.
SPVs solve this problem by giving access to deals to investors. In an SPV, the investment amount can be as low as USD 5,000 (depending on the terms drafted by the SPV organizer). At the same time, SPVs keep the cap table clean and organized for Startups.
Traditional venture capital fund allows investors to pool the money in one place, which is further allocated to different companies by the fund manager to gain advantages of diversification. In contrast, a special purpose vehicle or a syndicate focuses on investing in one single company. The details of the investment structure are defined in the operating agreement.
How does SPV work?
Coming to the main point – how do these legal structures work, and how can these syndicates make private investment beautiful for both startup founders and investors simultaneously? Technically, SPV works as a fund but on a deal-by-deal basis. Just as in a traditional fund, interested investors come together and put their money in one place, which the fund manager further manages. Unlike traditional funds, an SPV invests in a single pre-determined company, providing complete transparency to investing partners.
Investors who invest through an SPV don’t invest directly in the Startup. Instead, the members onboard transfer the funds into a newly created LLC (other legal structure SPVs such as Joint venture or LP can also be created). Further, the SPV created with a special investment purpose deploys the raised capital in a single transaction. Based on the membership holding of the SPV, the investors get the equity allocations of the Startup.
The membership proportion is calculated based on the contribution proportion mentioned in the Cap table of the LLC. For instance, an SPV raised USD 1,000,000, and a partner X contributed USD 10,000, which is 1% of the total capital raised. The SPV further wires the funds in a single entry to the Startup. Simplifying things for you, the participating investor is the member of the SPV, and the SPV is the investor of the Startup with a single entry in the cap table.
Continuing our example, if the SPV gets a 10% acquisition in the Startup in exchange for USD 1,000,000, then partner X will get 0.1% (1% membership proportion in SPV). The investment and operation agreements signed at the time of deal-making define the participating investor’s voting rights, pro-rata rights, and liquidation terms.
This is how SPV works!
Working of SPV at SPV Hub
SPV are legal entities and the creation of an SPV demands numerous steps which are mandatory to stay in the good books of the SEC. Also, the benefits of LLC and LP SPVs are state-specific. For instance, Delaware is the most preferred state offering the most flexible and business-friendly structure. Further, the administration of an SPV calls for different expertise including taxation and compliance.
By now, it must be clear that the creation and administration of an SPV need professionals. At SPV Hub, we work in all six areas – Legal, Tax, Accounting, Compliance, Administration, and support. Our professional team simplifies the working of an SPV for you. Take a look at how SPV works at SPV Hub.
Create a profile –
At SPV Hub, we aim to simplify the SPV creation process to enable investors, startup founders, and fund organizers to make the best out of the fundraising platform. We live in a fast-paced digital world. Leveraging the technology, we have fastened the creation and working of an SPV. The SPV organizer just needs to share the SPV requirements here to get started.
Answering the basic information including the size of the raise and tentative close date, you can start your SPV creation journey at SPV Hub.
Arrange the essential documents –
Once the organizer shares the required information, our SPV specialist gets in touch, discusses the requirements, and starts the process. The first and foremost – acquiring the essential documents. As mentioned, creating an SPV demands a series of legal and compliance activities. SPV specialist starts establishing the LLC or LP entity which includes acquiring an EIN number, contacting a registered agent, opening a bank account, etc.
Get Investors onboard –
Working of an SPV at SPV Hub through a digital medium is not restricted to creation. Once the legal formalities are complete and the SPV takes the desired shape, the organizer can invite potential investors using the link and other medium of digital platforms. Investors can overview the SPV details with just a click of a button. This is where the operating agreement, the minimum amount of investment, Investor’s stage, organizer’s group, total raise, and other note-worthy information regarding the SPV is disclosed.
Raise and deploy capital –
Interested investors can invest in the SPV and become members following three simple steps – Commit Investment, Sign Investor Documents, and wire funds. Once the desired capital is raised, the organizer can deploy the funds to the chosen startup in one single entry.
Post close activities –
The aftermath of investment includes constant maintenance of the entity to avoid getting canceled and other post-close activities such as filing taxes, distributing financials for the SPV, wiring profits to investors in respective ratios, etc. Another essential element of our Fund administration services is Pro-rata rights where the early investors are entitled with a choice to invest more in the start-up in future financing rounds. Also, if a member is willing to transfer his membership rights in the future, the transfers need legal documentation and updating of the cap table.
SPV Hub is the one-stop solution for SPV needs. The amalgamation of human touch resolving any possible dispute and digitization to speed up the fundraising process makes us stand out from the others.
