The Investor's Guide to Employee Led SPVs

Target Audience

  • Accredited investors who are considering investing directly into an employee led SPV brought to them by an employee

    • Also see the Master Plan for how employee led SPVs fit into the wider private capital markets.

  • Employees

  • CEOs

Overview

An employee can form a special purpose vehicle to raise capital from their network. The employee led SPV acts as a minority investor in a funding round of the employee’s VC backed employer. 

The employee can earn carry from the SPV in the case of a positive exit. This carry can become life changing wealth. It aligns the employee to maximize SPV’s investment.

The employee generally does not manage a portfolio of private investments. Their sole focus is generally on improving the value of the SPV's investment. This is unlike most external investors such as angels or VCs.

The Process

  1. VC backed startup employee reaches out to investors with a concise overview of the deal. This will include company details, round terms (if available), SPV terms, etc. and this guide.

  2. Employee asks investors for non-binding soft commits

  3. Employee asks CEO for allocation in a current priced or bridge round.

  4. The CEO confirms allocation amount and deal logistics. Logistics include docs, wire instructions, point of contact, etc.

  5. Employee shares full deal information with soft committed investors. This includes the deal memo, most recent deck, etc.

  6. Employee asks investors to confirm hard commits.

  7. Employee instructs SPV fund administration vendor to create SPV

  8. Employee shares link to SPV onboarding/funding portal with investors

  9. Investors complete SPV admin’s onboarding process

    1. Verifying investor qualification status

    2. KYC/AML

    3. Specifying funding entities, etc.

  10. Investors electronically execute subscription documents and wire funds to the SPV fund administrator.

    1. The employee never comes into possession of investor funds

  11. SPV fund admin

    1. executes stock purchase (or SAFE/note purchase) agreement with company

    2. wires funds to the company

  12. If the startup exits (acquisition, IPO, direct listing, etc.) at a valuation above the liquidation overhang or the SPV is able to sell its shares in a tender at a profit, then the SPV fund admin will

    1. Calculate any carried interest due to the SPV lead

    2. Distribute cash and/or shares to the investors and the SPV lead (if carried interest is due)

FAQ

  • What is the legal structure of an employee led SPV?

    • The SPV is generally a Delaware Series LLC or Series LP. This vehicle purchases shares of a single C-corporation. Each investor acts as a member of the LLC or a limited partner of the LP. A third party SPV fund administrator manages the Series LLC or LP.. The employee receives carry in exchange for acting as an advisor to the manager.

  • Can non accredited investors invest in the SPV?

    • No. This may change in the future..

  • What is the fee structure for an employee led SPV?

    • There are generally two types of fees

      • Admin fee

        • This is an upfront fee charged by the fund administrator to cover the lifetime expenses of the SPV. The SPV investors pay their pro rata share of the upfront fee. This fee goes entirely to the fund administrator. None of this fee goes to the employee.

        • The total fees usually range between $8k to $15k.

        • For example, if the admin fee is $10k, and 9 investors invest $50k each and one investor invests $550k into the SPV for a total of $1m in invested capital, then

          • 9 investors will pay $500 each

          • 1 investor will pay $5500.

      • Carried interest (“carry”, “profit interest”, etc.)

        • The investors pay a percentage of the profits to the lead when the fund administrator liquidates the SPV. Investors only pay this percentage after the SPV returns their initial capital.

        • It is usually an industry standard of 20%

          • For example, if the SPV has raised $1m and liquidates for a value of $500k (50% loss), then the investors do not pay any carry.

          • If the SPV has raised $1m and liquidates for a value of $3m, then the SPV lead earns $400k ($3m-$1m = $2m, $2m*20%) 

  • How much should investors expect an employee to invest in the SPV to align interests?

    • The employee can only invest in the SPV if the employee is an accredited investor.

    • Investors should not expect the employee to invest a significant amount in the SPV. The employee is investing their time, options exercise cash, and personal reputation. The employee is already incentivized to ensure the SPV performs well.

  • How is investing in an employee led SPV different from investing in an SPV or fund led by a non employee investor?

    • An external individual or institutional investor generally invests in a portfolio of companies. This split their focus across their portfolio. An employee spends almost all their time on maximizing the value of the SPV’s investment. This can be thousands of hours more than an outside investor.

  • Why not invest in the company directly?

    • Access

      • Getting allocation in a growing company is competitive. This also requires a direct relationship with the CEO

    • Check size

      • Direct investments have higher minimums unless the investor's value goes beyond capital. Employee led SPVs can accept checks as small as $1k.

    • Diligence

      •  An external investor needs to diligence the company. This can be time consuming and tedious work. The employee already has extensive domain expertise and internal knowledge of the company

  • Do SPVs have hurdle rates?

    • Hurdle rates/high watermarks are extremely rare in SPV type investments in VC backed companies. 

  • What are some potential tax related things an investor may want to look into? (NOTE: NOT TAX ADVICE)

  • How is carried interest calculated at exit?

    • IPO

      • The SPV administrator calculates the average of the closing prices for the first 5 trading days. That share price will be used as the “exit” price.

      • For example, assume an SPV bought 100 shares at $1/share and the average of the first 5 days of trading’s closing prices is $10/share. 

        • The SPV admin will calculate per share profit as $10-$1 = $9/share. 

        • $9/share * 100 shares = $900 in profit.

        • $900 in profit * 20% carried interest = $180 in carried interest.

        • $180 / $10/share = 18 shares that the SPV fund admin will transfer to the carry recipients. If dividing the carried interest by the exit price leads to a remainder, then the SPV fund admin will distribute the remainder amount in cash.

    • Secondary sale or acquisition

      • The SPV will take the sale or acquisition price as the exit price and conduct the same calculation as above. 

      • The carried interest may be distributed in all cash, shares of the acquirer, or a mix of both.

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