What's an SPV (Special Purpose Vehicle)?
An SPV, or Special Purpose Vehicle, is an independent legal entity formed to achieve a specific purpose. In the context of startups and financing, startups often use SPVs to secure outside investments from independent investors because it can help to limit personal risks among founders.
Additionally, an SPV may be advantageous for startups who wish to structure their financing differently than what traditional venture capital investors would offer. By leveraging the legal capabilities of an SPV, startups are able to not only close deals rapidly, but also customize agreements based on what best suits the needs of their business model.
How does an SPV work for Startups?
Special purpose vehicles (SPVs) are commonly used by startups to raise capital from investors. An SPV is created to act as an intermediary between a group of investors who want to pool their money and the startups they are investing in. By pooling their money, investors benefit from diversifying their investments while startups benefit by receiving pooled funding in one lump sum rather than having to pursue individual investments.
Benefits of setting up an SPV for Startups
Setting up a Special Purpose Vehicle (SPV) for startups can be a great decision for young entrepreneurs looking to obtain financing from private investors. SPVs are a type of legal entity that isolate funds from the parent organization and can be used to manage high risk investments like startups. This separation creates an added layer of safety that is beneficial for startups seeking out early stage financial backing, as it allows them to maintain control over their operations while providing investors with legal protection. For startups, setting up an SPV may give the edge they need when seeking out potential investors and securing funding for their venture.
Operating as a separate company, the SPV can also provide tax relief for startups and investors, making it well worth considering for those looking for a more efficient way to fund startups.
How SPVs impact the cap table of startups?
Startups can use special purpose vehicles, or SPVs, to offer equity investments to multiple investors and keep their cap table organized. By leveraging an SPV, startups can collect funds from many investors while efficiently managing the equity associated with those securities. This type of structure allows startups to diversify their investor base, coordinate complex reinvestment offers back to multiple current investors who might prefer different voting or liquidation rights, and still remain in compliance with applicable securities laws. Ultimately, the use of an SPV can give startups more control over how they manage their cap table when taking on additional investors.
What are the drawbacks of using SPVs for startups?
Using an SPV for startups can have drawbacks. Founders must consider the impact of adding another layer of complexity on top of their startups' existing structure. This means that extra paperwork must be completed to ensure accuracy and compliance with legal requirements.
Moreover, a founder's ability to raise additional capital may be limited by setting up their finances with an SPV since venture capitalists prefer startups with a simpler setup. Ultimately, while there are many potential benefits to establishing an SPV for startups, founders should carefully weigh the risks against those potential rewards before making such a decision. It is also reasonable to consider other ways of startup financing.
How to manage an SPV?
SPVs can play a big role on your cap table. Making sure it’s all taken care of is crucial for a less stressful startup life. Capboard offers the tool to keep your cap table clean and up to date, even when you have dozens of stakeholders. Create your digital cap table using our free cap table calculator.
Managing SPVs with Capboard is easy - check out our guide to managing SPVs on Capboard and forget about Excel spreadsheets for good.