Investors have many things to consider when evaluating startups, but one that may not be top of mind is how the investment itself is structured. For venture capital and equity crowdfunding, a common structure is to invest via a special purpose vehicle (sometimes structured as a limited liability company [LLC]) to fund up-and-coming companies or to acquire stakes in larger, private companies through secondary transactions.
How does an investment via an SPV work?
The SPV allows multiple investors to pool their money to invest in a startup. For an LLC, each investor buys a membership into the LLC rather than investing directly into the issuer. Whereas a traditional venture capital fund diversifies and invests in several companies, restricting investors from selecting a specific company in which to invest, a single-entity investment vehicle invests in one specific issuer.
Why do startups like SPVs?
This single-entity investment vehicle can simplify a startup’s cap table (a detailed spreadsheet that outlines all the stockowners of a company and the terms at which they have invested). Rather than listing each individual investor with the amount invested and supplying regular updates to each and every investor, the startup in this case would only need to add one entity to the cap table. By selling shares to a pool of investors, the startup may also be able to limit how active those investors can be in the company’s day-to-day operations.
Why do investors like SPVs?
Whereas a direct investment in a private company would typically total upwards of $50,000 or $100,000, or even more, an investment via an SPV typically comes with lower investment minimums. At MicroVentures, for Regulation D offerings, an investment typically starts at $3,000 or $5,000. When structured as an LLC, each member’s personal liability is generally limited to their percent of ownership. LLCs also typically pass the profits and losses on to members in proportion to their ownership percentage.
What are the downsides?
Investors who invest via an SPV don’t have individual rights in the private company and are subject to the SPV terms and agreements. Additionally, because the investments are managed by a third party, investors will not have direct access to the company. This becomes very important if investors express concerns to the managers of the SPV, putting their investment in the hands of the managers and requiring the managers to work with the startup on their behalf.
It is always necessary to think about the pros and cons of an SPV before you invest. This blog is not legal or tax advice, and investors should contact their attorney or accountant for specifics in regards to their particular situation. MicroVentures does not offer tax advice.
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