Investing in private companies via SPVs

When you want to buy stocks in a public company, you can (generally) just log in to your brokerage of choice, make a few clicks, and voilà—you’ve got equity. But if buying on the public market feels like a walk in the park, then investing in the private market can often feel like a marathon without directions or a map. 

If you’ve even taken a cursory look at what’s available in the private market, you’ll notice that one big difference between the public and private markets is how you get access to equity. In the private markets, you might participate in startup fundraising rounds, buy stock directly from existing shareholders, become part of a venture capital fund, or get into private equity. 

Another is investing via a SPV. 

You may have heard of SPVs—short for “special purpose vehicles”. You might understand the basic idea: that you buy into an investment vehicle and then buy shares in a company. You might have also heard that SPVs are somehow ‘worse’ than direct investing (this is a common rumor).

But is that true? What are the implications of investing via a SPV? How does it compare to other options, especially direct investing?

We know this can all seem intimidating. But when you get down to it, it’s not so complicated. In this guide, we’ll explain what SPVs are, how they work, and when you might and might not want to use them.

What is an SPV?

In a nutshell: An SPV is a vehicle formed to allow a group of investors to pool their capital. Typically this pool is then used to make a single investment in a specific company.

Before putting your money into the SPV, you’ll already know what company it’s investing in—so you can choose SPVs that are investing in the companies you want. In that way, investing via an SPV is more similar to direct investing than to, say, joining a VC fund, where the fund makes multiple investments, and you don’t have any say in what those investments are.

What does an SPV do?

SPVs are formed by people who know they want to invest in a specific company. The SPV then collects money from accredited investors. All capital is called upfront before the investment is made.

When you invest in an SPV, you become a ‘member’ of that SPV. Each member in the SPV has a ‘membership interest’ corresponding to the size of their investment. So if you put $5,000 into an SPV that ultimately raises $100,000, your membership interest is 5%.

Once the SPV has raised its full amount, it sends the money to the seller from which it is purchasing shares. After that, as far as the target company is concerned, the SPV is just like any other investor on its cap table.

On your end, too, your SPV investment functions much like any other investment because SPVs are ‘pass-through vehicles’— which means that gains and losses are passed through the SPV to its members in proportion to their membership interest.

What does that look like in practice?

Successful exit: If the startup has a successful exit (acquisition, merger, or IPO) at a price higher than what the SPV paid for the shares, the SPV will receive proceeds in the same way that any shareholder would. Those proceeds are then passed through to the members in proportion to their membership interest, and members each pay their own capital gains or other applicable tax. So, if the company your SPV invested in doubles in value between the sale and the exit, your $5,000 will turn into $10,000.

Liquidation event: If the startup has a liquidation event that is not a successful exit (e.g. bankruptcy, restructuring, or major asset sale), and the SPV has a liquidation preference that allows it to get some of that payout, you may get back some amount that is less than your original investment—again, in proportion to your membership interest. Or, like with any startup investment, if the company’s liabilities exceed its assets at the time of liquidation, you won’t get any money back.

What is an SPV, legally?

SPVs are set up as legal entities, most commonly LLCs. LLC stands for ‘limited liability company’, because the members of the LLC—in this case, the investors in the SPV—aren’t held personally responsible for the LLC’s debts or liabilities. That means that when you invest via an SPV your downside risk is generally limited to the amount of money you put in: generally, the worst that can happen is that your entire investment goes to zero.

Every SPV has governing documents that lay out the terms of the SPV, covering things like voting rights, fees, and more. No two SPVs have the exact same terms.

The terms of the SPV are set by the ‘SPV organizer. This is the person or firm that sets up the SPV, sources the target investment, works with investors in the SPV, and acts as the point of contact with the company you’re investing in.

Why should I use an SPV?

SPVs let you access more opportunities

Private investment opportunities often have a high minimum transaction size that most accredited investors can’t meet on their own. This is especially true for later-stage investments, since later-stage companies have typically reached higher valuations. 

High investment minimums make good sense on the company’s side— when a startup is fundraising, accepting small checks would cost them extra in legal fees, not to mention being an administrative burden. Private companies also want to avoid having a large number of shareholders. But as an individual investor, high minimums often mean you’re shut out of deals.

SPVs have lower investment minimums

High investment minimums make it harder to diversify your portfolio—which is a big problem when you’re investing in startups since most startups fail. Depending on your goals, some of the existing minimums might be a lot of money to invest in a single company, and you might feel that money would be better spent hedging your bets across a range of other investments. But all else equal, you’d still like to have exposure to big-name private companies. So what can you do?

With direct investing, you often only have two options: make a big investment or don’t invest at all. SPVs offer a third option. With an SPV, you can get exposure to high-valuation private companies with a significantly smaller investment, like $25,000. 

SPVs are more attractive to companies

If you could pool your money with other investors in an SPV, the SPV can buy more shares than you could buy on your own. That makes the SPV a bigger and more attractive investor to the target company, which means it can secure better deal terms and have a higher likelihood of closing the transaction. Most importantly, it gives you an opportunity to invest in a company that would otherwise not have entertained an investment from you directly. 

What are the downsides of SPVs?

While SPVs can make it easier to invest in private companies, they might not come with all the same advantages as direct investing. Whether the upsides of investing via an SPV outweigh the downsides is ultimately up to you.

SPVs may require additional admin and fees

Once you’ve put your money into an SPV, your investment is strictly governed by the terms you agreed to. That means you can’t withdraw your money, and you may be subject to other restrictions as well.

SPVs can be even less liquid than direct investing

Once you’ve put your money into an SPV, your investment is strictly governed by the terms you agreed to. That means you can’t withdraw your money, and you may be subject to other restrictions as well.

Recap

• An SPV lets investors pool their capital to make a single investment in a specific company.

• The SPV passes gains or losses on to you, proportional to your investment. In this way, it’s similar to direct investing. If the company’s valuation doubles (from the time the SPV makes the investment), so does your investment (though you’ll also often have to pay some fees to the SPV off the top).

• You can get access to opportunities that would not otherwise be available to small investors. Shares sales of major private companies are usually completed in large tranches in the seven figure range. Using SPVs, Hiive allows you to access these opportunities with investment minimums as low as $25,000. 

You won’t have a direct stake in the private company. As a member of the SPV, you won’t actually own shares of the target company. You will have an indirect stake in the company.

1. You might be confused by some of the articles you find that claim to explain SPVs, because they’re not targeted at your use case. SPVs are sometimes used by existing funds or companies for a variety of reasons. But here, we’re talking about how SPVs can work for individual investors like you who are interested in acquiring stock in private companies

2.  SPVs are regulated by the SEC, and there are strict limits on the number of members they can have. SPVs raising more than $10 million can have a maximum of 100 members; all others can have a maximum of 250.

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