Angel investing has become an increasingly popular way for high net worth individuals to allocate capital in startup companies. Structuring angel investments can be complex, involving considerations around fund structure, tax implications, and investor rights. Using a Special Purpose Vehicle (SPV) is one approach to structure angel investments that offers certain benefits compared to direct angel investing. In this article, we will examine the key differences between regular angel investing vs investing via a SPV, including pros and cons of each approach. We will also look at examples of how SPVs are commonly used by angel investor groups.
SPVs allow angels to invest as a single entity, streamlining investment process
One of the main benefits of using a SPV for angel investments is that it allows a group of angels to invest as one legal entity. This can greatly streamline the investment process compared to individual angels each negotiating terms separately. Typically, one angel will serve as the lead and negotiate terms with the startup company. The other angels simply invest in the SPV, rather than directly in the company. This simplified process makes it easier to complete investments quickly, which is often critical for startups seeking funding.
SPVs provide liability protection for angel investors
Investing via an SPV also provides liability protection for the angel investors. With typical direct angel investments, the angels take on unlimited liability, meaning their personal assets are at risk if the startup company gets sued. But investing via a SPV limits this liability. The SPV serves as an intermediate entity that absorbs any potential losses first before impacting the angels. This liability protection gives angels more flexibility to take risks with their investment capital.
SPV structure has tax advantages for certain types of angels
The SPV structure can also provide tax advantages in certain situations. For example, investing via an SPV may allow angels to defer capital gains taxes on their investment profits until the SPV distributions occur. This benefit may appeal to angels with substantial capital gains that they want to defer. However, SPV tax treatment can be complex, so angels should consult tax experts before using this structure solely for tax purposes.
SPVs allow angels to fund investments collectively
For high valuation startup investments that are too large for one angel, SPVs provide a way for a group to collectively fund the deal. The SPV pools capital from all the participating angels and presents one unified investment entity to the startup. This aggregated capital can help angels do larger deals they couldn’t access individually. Groups like AngelList and Syndicates leverage SPVs so groups of angels can co-invest in deals together.
Regular angel investing allows more flexibility on deal terms
Although SPVs can streamline the investment process, some angels prefer direct investing because it gives them more control over deal terms. With an SPV, the lead angel negotiates terms and the other angels essentially tag along. But investing directly, each angel can tailor deal terms to suit their individual preferences. Of course, this flexibility requires more work negotiating multiple agreements with the startup.
Using an SPV provides certain benefits for angel investors around investment process, liability protection and taxation that may make it an appealing structure in some cases. However, SPVs also limit flexibility compared to direct angel investing. Overall, the ideal structure depends on the specific investors, startup company, and context of the deal.