Investing in a startup can be a risky endeavour, so entrepreneurs need to be aware of the options they have to make sure their assets are protected. One option that is becoming increasingly popular is the special purpose vehicle (SPV), which can help startups raise investment while also protecting their assets. Let’s take a closer look at what a special purpose vehicle is.
Here are some of the main advantages of SPV’s
- Help to raise capital
- Protect investor’s liability
- Attract a wider range of investors
- Potential tax advantages
What Is an Special Purpose Vehicle?
An SPV is a legal entity created with the specific purpose of facilitating certain transactions or investments, such as raising capital for a startup. Understanding SPV’s is an important step in becoming investment ready. An SPV can take the form of a corporation, limited liability company, or other type of legal entity. The purpose of an SPV is to isolate and protect the assets used in the specific transaction from those of the parent company or individual investors. This helps limit any potential losses from the transaction should it not be successful.
A special purpose vehicle (SPV) is an entity used by angel investors to manage their investments. A common type of SPV used by angel investors are trusts, with syndicate trusts often used to pool investments from multiple investors into one larger investment. Keep reading for more detail on syndicate trusts. Through an SPV, angel investors limit their personal liability as they can create a separate entity to conduct all transactions related to their investments without exposing themselves to additional risk from other activities conducted by the angels themselves. You might also find our post on the SEIS scheme helpful for you startup!
In addition, the creation of an SPV enables the investor to protect the specifics of their investments from public disclosure. With the help of this special purpose structure, angel investors can currently become more involved with start-ups and entrepreneurial initiatives without having to open themselves up to greater levels of personal risk.
How Can an SPV Help Startups?
Raising More Capital
Special purpose vehicles (SPV) can be financial entities used to help startups raise more capital. It is important for any founder to fully understand what a Special Purpose Vehicle is. An SPV is typically an independent, legally separate company that is created for a specific purpose, like raising funds. This separation of the startup from its investors allows it to attract investments from a wider range of sources and gives the founders more control over their own business. This can help attract more investors, and ultimately give startups a higher chance of fundraising success.
What’s more, forming an SPV leads to a less complex and tax-efficient financing structure which can allow startups to raise capital quickly and at better terms than other funding options. As such, SPVs offer unique advantages that make them an attractive choice for many startups looking to grow their businesses by raising additional capital.
Syndicate Trusts
Whilst the question ‘What is a Special purpose Vehicle?’ is of course important, understanding the different types of trusts used as SPV’s for angel investors is equally important. Syndicate trusts are specialized structures that are increasingly being used by angel investors to make investments in various types of business ventures. By setting up a trust and appointing trustees, angel investors can benefit from the trust’s special-purpose vehicle (SPV) status which provides greater asset protection and risk mitigation. Through syndicate trusts, investors receive greater control over the funds they contributed and have enhanced powers to manage their investments.
Another benefit of syndicate trusts is access to larger funding rounds. When investors pool their money into an SPV, this can be used to make a single, larger ticket investment into a funding round that individual investors may not have access to on their own. This is often seen as a better alternative to crowdfunding for angel investors who are serious about working with startup companies.
Control
In addition, setting up an SPV gives you greater control over your investments because you are able to establish rules and regulations governing how your funds will be used and distributed among investors. This helps ensure that all parties involved in the transaction understand exactly what they are agreeing to before investing any money into your startup venture. Finally, having an SPV also makes it easier for you to manage taxes associated with any income earned from your venture, making it simpler for you to file taxes on time each year. Exporaise is here to help you with your understanding of all of these aspects, and to help you to become investment ready.
Conclusion
In conclusion, special purpose vehicles can provide many benefits for startups looking for ways to raise investment capital without putting their own personal or corporate assets at risk. By setting up an SPV, entrepreneurs have greater control over their investments and can easily manage taxes associated with any income earned through their venture. With this knowledge in hand, entrepreneurs should now have a better understanding of what special purpose vehicles are and how they can help startups attract new investors while also protecting existing assets.