The Employee's Guide to Employee Led SPVs

A comprehensive open source guide

Target Audience

  • Employees

    • of venture capital backed companies 

    • who have been with their employer for at least 3 months

      • Why 3 months? Generally enough time for employee to know if they want to stay at the company long term. 

    • who are interested in getting significantly more equity upside.

    • who are either based in the US or their VC backed employer is based in the US

      • <todo: process for non US companies>

    • If you meet these qualifications and your employer has raised at least a Series A, please schedule a Zoom with me

  • Investors

  • CEOs

How to use this guide

Read everything from here to the end of “The Process” which should take ~10 minutes.

After that, schedule 1 hour to read the remainder in detail. Make sure you have a notepad or note taking app open since you will likely have many questions. Read all the way to the end. Every word in this document has been carefully chosen to maximize the probability of you making tens of millions of dollars.

Overview

You can virtually choose how much equity upside you would like in your employer.

  • How? Buy it with other people’s money. 

    • Raise capital from your network by forming a special purpose vehicle (SPV), which is a fund that has the sole purpose of collecting capital from investors to make a single investment. 

    • As the organizer of the SPV, you can charge a % of the profits in an exit (carry).

      • This can potentially be many multiples of your options/RSUs. 

      • You’re only limited by how much allocation (the amount the CEO will let you invest in each round) and investor capital you can gather. 

How is this different from asking for more incentive stock options (ISOs)? Options (the right to purchase common stock at a significant discount to preferred stock) are a form of compensation. A company sets aside a certain number of common shares that go into an “option pool”. The rest of the shares outstanding are either common shares that belong to the founders (or former employees) or preferred shares that belong to investors. 

The option pool is generally between 10-20% of shares outstanding at any given time. Which is another way of saying that there is a hard upper limit on how many options are available to employees at any given time. Even the most desirable employee can’t receive more than what’s in the option pool. Expanding the size of the pool requires board approval. The options in the pool are needed to recruit and retain employees so negotiating for more options is almost a zero sum game against current and future employees. 

Also, there is a scenario where the company doesn’t use up the entire option pool. For example, if the company exits, having hired far fewer employees than projected, then many shares in the option pool would have not been issued. So option grants are an expensive form of dilution to the company.

In contrast, a company needs to raise a certain amount at a given round. It’s economically irrelevant to the company whether all of that capital comes from a lead investor or if only some of it comes from a lead investor and the rest from minority investors, as long as the company gets the desired:

  • Terms (preferred price, liquidation preference, etc.)

  • Board members

  • Timeline

  • Total capital raised

If an employee wants, for example, 5% of the company via options, that will be an extremely challenging negotiation at any point in the company’s life cycle short of joining as a co founder or one of the first 5 employees. But if the employee is willing to fundraise and buy the equivalent or more over time as an investor, then that’s generally not an issue and will often be welcome by the company since it solves three problems at once: 

  • Getting the needed capital

  • Increasing alignment with employee so they behave more like an owner

  • Reducing likelihood of the employee leaving for alternative opportunities (voluntary turnover)

Example Scenario

For example if  the company is raising a Series A at a preferred share price of $1 and you secure $200k in commitments:

  • You’ll instruct your fund admin to form an SPV (LLC) and open a bank account

  • The investors will execute subscription docs (becoming members of the LLC)

  • The investors will wire $200k to the SPV’s bank account

  • The fund admin will sign a stock (or note) purchase agreement with the company on behalf of the SPV

  • The SPV will wire $200k to the company

  • The company will provide the fund admin a login to the company’s cap table management portal

  • The fund admin will verify that the SPV’s ownership in the company is correct

  • The SPV now has a capital value of $200k.

If the company does not raise another round and then exits at a preferred share price of $10, then 

  • The SPV capital value is $2m 

    • 200k shares * $10/share 

  • The profit to the SPV is $1.8m  

    • $2m - $0.2m 

  • Carried interest to the SPV lead is $360k

    • 20% *  $1.8m

This becomes especially lucrative when the company has multiple funding rounds and you scale up how much capital you raise and invest in each round. 

For example, if you raise a $10m syndicate and the company exits at a 2x multiple, then your carried interest is $2m ($20m-$10m = $10m, $10m * 20% = $2m)

These examples are for illustration only and don’t take into account dilution, taxes, fees, etc. 

Here is an example financial model you can use to work through different scenarios.

To clarify: there is always the downside risk of the company failing in which case no carry will be earned by the lead and the investor principal will be lost.

The Process

  1. Determine how much you can raise from your network

  2. Ask your CEO for half the above amount in allocation in a current or future round

  3. Instruct your chosen vendor to form an SPV

  4. Get your investors to fund their commitments to SPV

  5. Vendor has SPV buy shares in the company

  6. You continue networking and growing your investor base

  7. Repeat the above steps at every round

  8. If your employer exits (acquisition, IPO, direct listing, etc.) at a valuation above the liquidation overhang, then collect your carried interest in the form of cash or shares from your SPV fund administrator.

Determine how much you can raise from your network

  1. Your email communication volume is likely to increase dramatically from this point forward

    1. Make sure you are able to handle email optimally by learning how to get to Inbox Zero fairly often in both your personal and work email inboxes before you proceed to the next steps.

      1. Tools like Superhuman can help with this.

    2. You can skip this step but that is not advisable given how high stakes your email conversations will become as part of this process. 

    3. Efficiently handling email can result in hundreds of thousands of additional dollars raised per round which can potentially become millions in additional carry.

  2. Securities law is complicated and changes frequently. Reach out to a fund formation lawyer and share this guide with them. They will be a critical partner to you if you choose to continue this process. At a *minimum*, you should ask

    1. If you qualify as an accredited investor and how you qualify

    2. Who you can and can’t share the opportunity with

    3. What you can and can’t say/share

    4. What disclaimers you need to provide to investors

  3. Save a copy of this template and add the names of 20 friends/family/former colleagues (NOT PEOPLE AT YOUR CURRENT EMPLOYER) that you strongly believe

    1. Are likely to be accredited investors

      1. Don’t worry too much about this since your SPV service provider will verify their status before allowing them to invest

  4. Prepare a company overview

    1. Save a copy of this template and complete it with your company’s information

  5. Reach out to each person on your list using the following scripts (feel free to modify as needed)

    1. Say below over the phone or text (not over email to avoid risk of forwarding)

      1. “Hey X, I’ve been working at <your company’s name> for a while now and am pretty excited about how things are growing. I may have the opportunity to invest in the company (<link to company overview you made in previous step>) and invite a few people to participate with me through an Employee Led SPV (Investor guide for more context). Are you interested in learning more about potentially investing?”

      2. If the company’s valuation is > $50m, you may want to mention that they might be able to invest via their IRA/401k.

        1. If they don’t already have an account, they’ll need to open one with an alternative IRA administrator early since there is a waiting period before they can make investments

    2. If you find it easier to discuss over a call, then can text/email them saying

      1. “I have a potential opportunity and would love to get your thoughts on it. Do you have a few minutes for a quick call?”

        1. Send them the overview after the call 

  6. If they say yes, then ask them the following and record the answers in your spreadsheet

    1. Their check size range for investments of this kind

      1. “What’s a ballpark range of what you might invest in an opportunity like this?”

      2. Record the lowest # they give you in the “Soft Commit” column

    2. What information do they need to make a decision?

    3. Who else would be involved in making a decision (spouse, parents, friend, advisor, etc.)?

    4. If they know any other people who might be interested?

      1. “Can you think of anyone else that might be interested in learning about an opportunity like this?”

      2. If they say yes,

        1. “Great, can I send you a forwardable email to share with <whoever they mentioned>?”

      3. <todo: forwardable email template which includes link to Investor Guide>

  7. Repeat the above process with your entire network (NOT WITH PEOPLE YOU CURRENTLY WORK WITH) until you have at least $400k in soft commits

    1. Only reach out to individuals.

    2. Don’t react out to VC firms or other institutional investors. 

  8. The reason to continue until you have $400k in appetite is because $200k is about when the costs of an SPV (~$10k in admin fees paid proportionally  by investors) becomes relatively small compared to total investment amount (expense ratio of 5%)

Negotiating for Allocation

WARNING: ONLY SPEAK WITH THE CEO ABOUT ALLOCATION. DO NOT SPEAK WITH ANYONE ELSE (HIRING MANAGER, COLLEAGUES, ETC.)

  1. Message your CEO via email or Slack (or other internal chat tool) saying the following ($xxxk = half of your soft commits So if you have $400k in soft commits, then use $200k in the below template)

    1. If a round has recently been internally or publicly announced 

      1. “Hey X, I’d like to invest $xxxk at the same terms as the lead. What are the next steps re docs and wire instructions? Who should I coordinate with?”

    2. If it has been a while since the last round and there isn’t any public or internal mention of a new round 

      1. “Hey X, I’d like to invest $xxxk. If there isn’t a round currently open, I’d be happy to 1) do it on a note/SAFE at a discount to the next round 2) find a price that reflects our growth since the last priced round or 3) participate on the same terms as the lead in our next priced round”

  2. If CEO says 

    1. a note will work 

      1. “What are the best next steps re docs + wire instructions? Who should I coordinate with?”

    2. that it would be better to find a preferred price

      1. <todo>

    3. best to wait until next priced round

      1. “Sounds good! Do you have an idea of when that might be?”

      2. Follow up every quarter. 

        1. <todo: template>

    4. That you can swap your salary for more options at 409a price instead of investing

      1. Reply with: “Thanks! Appreciate the flexibility. I’ll come back to you on this. Regardless, I’m still interested in investing directly”

  3. If the CEO agrees and provides next steps, then say

    1. “Thanks! Could you also share the most recent investor deck and preferred share price history?”

  4. If the CEO objects, then share the CEO facing guide with them.

    1. “Totally understand that you have concerns. The best way I can address them is to share this guide to employee led SPVs that is specifically meant for CEOs.”

Filling the allocation

  1. Once you have the deck and investment docs

    1. Reach back out to everyone who expressed interest and a soft commit dollar amount (starting from smallest to largest) and schedule a quick call to sync

      1. Don’t reveal any information that isn’t mentioned in a public source

      2. Share the terms of the investment (carry terms, valuation, whether preferred shares or a note, etc.)

      3. If necessary, walk through the deck with them over screen share. Do not share the actual deck with them. This is to prevent leaks.

      4. Ask them for an updated soft commit and update the number in the spreadsheet

      5. <todo: add NDA step and dynamic watermarking deal room step so employee can share deal room w/ investor after investor executes NDA>

  2. After two business days, reach out to your soft commits and ask them for a hard commit

    1. Update the spreadsheet with the hard commit amount

  3. Once you have $xxxk in hard commits

    1. Sign up with a SPV service provider to form an SPV.

    2. Share this guide with your point of contact so they understand what you are trying to do. 

  4. The service provider will

    1. Assign you an account manager to coordinate the process

    2. Give you access to the SPV organizer portal where you can submit information about the deal (company name, valuation, stage, any supporting docs like a deck, etc.)

    3. Generate a link to the funding portal you can share with potential investors

  5. Share the link to the investors that hard committed and ask them to fund within 1 week

  6. Follow up every other day with your investors until your service provider shows the allocation is fully funded

  7. If you are oversubscribed (investors want to invest more than the allocation you were given by CEO)

    1. Contact CEO or whoever your fundraising point of contact is and ask for additional allocation

      1. $Q is 50% of the hard committed oversubscribed amount

      2. “Hey X, I’d like to raise my commitment to $Q, is that feasible?”

  8. Stay in frequent touch with your service provider account manager until they

    1. Collect all funds from investors

    2. Execute the docs 

    3. Wire funds to the company

    4. Receive cap table management system portal access from the company which verifies the SPVs ownership stake in the company

Carry assignment

  1. Carry entity setup

    1. Ask your lawyer if you should have your SPV provider assign the carry to you directly or if you should form an entity (LLC, etc.) to receive the carry

      1. see Service Providers for formation companies

  2. ERA registration

    1. Ask your lawyer if you need to register as an Exempt Reporting Advisor. This is often dependent on which state you reside in, total assets you advise on, etc.

FAQ

  • When is the optimal time to ask for an allocation?

    • The optimal time to ask for allocation is after you’ve been at the company for at least 3 months. This provides the employee and company the equivalent of a 90 day full time mutual due diligence period. 

    • An employee can also ask for allocation prior to accepting an offer if they are exceptionally excited about the company and its prospects but this can complicate the offer process.

    • Ideally an employee should not ask for allocation if they are planning to leave the company soon or have already left. 

  • If the company is being pursued by multiple top tier investors and brand name individuals, why would it take capital from an employee led SPV?

    • Salaries are generally one of the largest uses of raised capital. This makes talent retention a top of mind concern for startup founders/executives. If an employee leads SPVs into their employer, then the employee is highly incentivized to stay at the company even if the employee’s cash compensation doesn’t grow dramatically. This significantly reduces voluntary turnover especially after employees pass their 1 year cliff and start receiving competitive offers from other employers.

    • There is a tradeoff that the carry is not vested like options and an employee can theoretically raise an SPV, invest it into the company, and then leave right after the deal closes. However, since they are raising from their network, they have strong social incentives to stay at the company. Also, there are compounding benefits to staying at the company, especially since the employee can raise future SPVs.

  • Do I need to be an accredited investor to be an advisor (one who receives carry) to an SPV?

    • No, but confirm this with your attorney

  • Can the SPV do multiple closings?

    • Yes, for example, the company is raising on a SAFE in between priced rounds

      • The employee led SPV raises $500k, the SPV wires $500k to the company and executes the SAFE for $500k

      • The employee led SPV stays open and raises another $400k, wires it to the company, and executes a $400k SAFE. 

      • This should be functionally equivalent to all the SPV raising all the capital up front and executing a $900k SAFE. 

  • Can the employee invest in the SPV itself?

    • Yes if the employee is an accredited investor. 

  • What are the tradeoffs of the employee investing in the SPV to demonstrate skin in the game/incentive alignment

    • Only feasible if the employee can qualify as an accredited investor. If so, investors may look upon this favorably. Generally SPV leads commit up to 2.5% of total capital raised.

  • Can this backfire on an employee in any way? Could asking for allocation and/or filling it with an SPV upset the CEO, other executives, etc.?

    • Anything is possible but it’s hard to imagine a scenario where this occurs.

  • Has anyone reported that any CEO has felt that an employee asking for allocation is overly pushy/inappropriate?

    • No. In fact many CEOs have generally expressed enthusiasm at the concept.

  • Multiple employees working together

    • Can multiple employees approach the CEO together to ask for an allocation? 

      • Yes, this may increase the chances of getting an allocation and may increase the size of allocation received. For example, if the CEO is willing to give $500k allocation to one employee, then the CEO may be willing to give $1m or more allocation to two or more employees. 

      • This has the tradeoff of more complexity (multiple leads, more LPs, etc.) which needs to be weighed against the increased probability of getting an allocation.

    • Does each employee set up their own SPV or can employees use one SPV and share carry?

      • Either approach will work but it’s cheaper and more efficient to use one SPV and have the fund administrator assign carry to each one of the leads. Consult with your attorney regarding what formulas you can use to allocate carry.

    • Can SPV leads allocate carry in proportion to the amount each co-lead raised? 

      • This is a gray area and you should consult with an attorney. Generally you can share carry based on other factors (every lead receives equal carry, etc.) or based on total allocation sourced, but sharing carry purely in proportion to the amount each lead raises may be considered broker-dealer territory. 

  • Will investors have an issue with an employee leading a syndicate into a round while the employee is simultaneously selling some of their exercised common shares in a secondary during that round?

    • Shouldn’t be an issue though seems reasonable to disclose this to the SPV investors. It’s up to each investor however a case can be made that an employee is already extremely concentrated in the company through multiple means (sole salary, options, reputation, SPV carry, etc.) and that it would not hurt for the employee to have some liquidity. Check with counsel. 

  • Can the employee offer different carry terms to different investors

    • Yes. This is usually done through a “side-letter” that stipulates how a given investor’s terms differ from those of the SPV’s formation/subscription documents.  Ask your SPV fund admin and lawyer to help facilitate this. 

    • Employees will offer different carry terms to investors generally only in exchange for some sort of significant value add. For example, if an investor is willing to bring a significant amount of capital or act as an anchor investor that will draw other investors, etc. then the lead may offer this investor a discounted carry and/or a hurdle.

How to Contribute

This guide is open source. Please DM me on LinkedIn or Twitter and I’ll add you to the source GDoc.

I’ll update the Substack hosted public facing site with the content from the source GDoc after any material round of changes.

Thanks

Hundreds of people have directly or indirectly contributed to this guide. 

<todo list of contributors>

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