Angel Investing via SPVs VS. Micro-Funds: how to choose the right structure for your syndicate?

Do you think of investing in a startup alongside other angel investors? This article breaks down the two types of structures: SPVs (special purpose vehicles) and micro-funds. We have compared them and learned all the pros, cons, and risks.
Polina Hafizova
🇪🇪 Columnist
11 min read

Do you think of investing in a startup alongside other angel investors and are looking for the right structure? This article breaks down the two types of structures: SPVs (special purpose vehicles) and micro-funds. We have compared them using different criteria and learned all the pros, cons, and risks so that you can make the right decision.

From this article you can learn: 

  1. What is an SPV, and how does angel investing via SPVs work?
  2. Why do investors use SPVs? Benefits
  3. Risks and limitations associated with SPVs
  4. What is a micro-fund structure, and how do micro funds work?
  5. Why do investors use micro-funds? Benefits
  6. Risks and limitations associated with micro-funds
  7. SPVs vs micro-funds: which one should you choose?

What is an SPV, and how does angel investing via SPVs work?

An SPV (special purpose vehicle) is a company created for investors who want to pool funds and invest in just one asset. The SPV funds belong to the company’s members; the profit or loss is allocated to each member in proportion to their share of the investment. 

How does creating an SPV work? 

✅ Step 1: Investors (LPs) decideto create an SPV, join together as a group, and pool funds

✅ Step 2: SPV members choose the organization's legal structure. They can choose from:

  • A trust — includes one party (the settlor) that gives another one (the trustee) the right to hold assets for the benefit of a third party (the beneficiary).
  • Limited Liability Company (LLC) is a company that combines the characteristics of a corporation and a partnership. The LLC members are protected from personal liability for debts and liabilities. Members may not pay taxes on profits directly but still have to include profits and losses on their tax returns.
  • A corporation is a legal entity that has the same rights as individuals. Shareholders are not personally liable for the company's debts and are not bound by obligations or property.

✅ Step 3: Platform selection and payment 

Creating and operating an SPV can be facilitated by lawyers, but nowadays, it is typically done through specific platforms such as Angellist, Flow, Assure, Allocations, and many others.

The total costs start at around $7,000 to $15,000. The funds are used to pay for the platform’s services and set up fees, typically including SPV registration, bank account opening, capital pooling, and administration where needed. 

The final costs of the SPV depend on several factors:

  • Jurisdiction. Depending on the country, it may cost more to set up an SPV, and some countries  may have  additional tax obligations.
  • The service provider’s terms and conditions.
  • Customisation. The more flexibility you would like to provide your investors, the more expensive the SPV.

Each SPV is unique as angel investors may pool in different groups and wish to vary the structure by adding new terms, redemption rights, threshold rates, etc.

Its lead investor controls an SPV, often called a syndicate lead. They initiate a deal and are supposed to commit a substantial share of allocation into the SPV. In addition, they are responsible for due diligence, communication with founders and investors, risk assessment and administration of the SPV, and wire transfers.

While terms may vary, the syndicate lead is usually paid for their deal sourcing and syndicating services (0-5% one-off fee) and carried interest (also known as “carry”) — anywhere from 5% up to 20%.

Every LP receives a share in the SPVs reflecting their allocation in the specific deal. If an angel investor wants to withdraw from the SPV, they can normally sell their share only to one of the members of this SPV.

✅ Step 4: Investing. 

After the funds are raised, the SPV makes a one-off investment in the company. It will create an that entry will show up as one line on the cap table of this company, regardless of how many investors have invested their money in the asset. 

The cap table below details how a company shareholder’s information diffuses, including the number and percentage of shares they own.

SPVs are typically non-regulated structures, meaning that financial supervision authorities do not look at them as financial activity companies unless they raise more than 1 million EUR or have more than 149 investors. 

Angel investors use SPVs for deal-by-deal investments in startups, and for pooling capital to invest in venture funds as a single limited partner, which normally requires quite a substantial minimum ticket.

How an SPV works: 

Why Do Investors Use SPVs? Benefits

An SPV is a convenient and straight forward structure for investors who want to pool funds to invest in a specific project or venture fund. 

Benefits of using an SPV:

  • Simplicity. SPVs allow you to work with co-investors without adding them to the cap table. As such, it means less management and a more straight forward process for the company raising funds;
  • Affordability. SPVs give angel investors more accessible entry points, facilitating business angels' participation and allowing them to find their own niche in the investment market. 
  • Transparency. In funds, angel investors have no say over the investments GPs (General Partners) make in specific companies. When investing in an SPV, each investor can only engage with the investments in which they are interested.

Risks and limitations associated with SPVs

All investments are risky. It is crucial to be know the principal risk factors to minimize risks.

The disadvantages of an SPV:

  • Lack of diversification. SPVs make one investment in one company, increasing risks. However, diversification is mainly a secondary issue for angel investors, as it’s an every day practice to invest in a number of companies via a series of SPVs.
  • No voting rights. SPV investors turn over their voting rights to the lead investor and do not usually receive investment news and company updates. They have to monitor the status of their own investments themselves. 
  • Inability to manage assets. SPVs do not offer to handleany financial activity. 
  • Having to learn all legal intricacies of the country in which the SPV is established. Angel investors will have to spend extra time and money to understand what responsibilities they have to bear. This problem does not apply to US investors, where these problems are solved at the federal level. US investors only have to declare income by filing a special K-1 form.

What is a micro-fund, and how does a micro-fund work?

A micro-fund is a type of closed-end venture capital fund. It is a tax-exempt legal structure with a different legal status than SPVs. Each angel investor pays taxes according to the laws of the country of his/her residence. 

What makes micro-funds different from traditional venture funds is their smaller size, lower costs of creation, and thus possibile to use as an alternative to non-regulated SPVs.

A micro-fund is a type of closed-end venture capital fund. It is a tax-exempt legal structure with a different legal status than SPVs. Each angel investor pays taxes according to the laws of the country of his residence. 

What makes micro-funds different from traditional venture funds is their smaller size, lower costs of creation, and thus possibile to use as an alternative to non-regulated SPVs.

How does a micro-fund work?

Pretty much the same way as SPVs. But instead of a self-nominated syndicate lead, micro funds have an appointed GP (general partner) registered with a local financial regulator and bearing liability.

You can easily create and manage a micro-fund via the Uniborn platform, which takes all the hassle out — registration of a fund, opening a bank account, pooling capital, calculating and reporting NAV (net asset value), tax reports, and getting updates from the company.  

Micro-funds have three types of members:

  • General Partners — regulated fund managers;
  • Limited Partners — all the angel investors in the fund;
  • Investment Advisor — the syndicate lead who leads the deal.

The relationship between fund participants is regulated by a Limited Partnership Agreement (LPA)

What do LPAs include?

  • Distribution of carry (income generated by asset appreciation) among fund participants, depending on the value that each angel investor brings;
  • Management and one-off fees. All the fees might be customized to offer specific terms to different tiers of investors.
  • The investment policy of the fund, articulating all the specifics of where the funds will be ultimately allocated;
  • Liquidity options;
  • Accounting and reporting rules;
  • Evaluating and disclosure of NAV.

How can angel investors set up a micro fund? 

✅ The first way is to become a GP. To do so, you need to be accredited by your local financial supervision authority. The procedure cost will start at €50,000, and the process will take anywhere from 6 months to 2 years. Most likely, during this period, the transaction will become irrelevant, making setting up a micro-fund pointless. 

✅ The second option is to join a GP with an established structure and can set up a separate micro-fund for angel investors. The process will only take 1-2 days. And, since GPs are responsible for taking care of the fund, including calculating the value of the tax assets, filing tax returns, and maintaining the register of shareholders — you will not have to take administration and all back office stuff on you.

The micro-fund structure:

As opposed to SPVs, micro-funds are structured in a way that makes it possible to invest both in a single asset and in a series of assets.

Why Do Investors Use Micro-Funds? Benefits

A micro-fund structure is a sound investment vehicle often used by experienced angel investors.

Micro-fund benefits:

  • A straightforward structure regulated by EU law;
  • Security. Since GPs have an obligation by the law, investors get an additional level of protection: proper due diligence, KYC, and AML checks, which eliminate investors’ risks down the line;
  • Relatively low costs (if you use platforms). Setting up a micro-fund with a GP is less expensive than setting up an SPV. The Uniborn platform helps you create a micro fund and takes care of all the hassle and most of the costs, making the whole process half to three times the cost;
  • Customisation — GPs can customize the terms and details to achieve the fund's desired goals;
  • No bank account problems. Due to a micro-fund’s structure bank account opening procedures are more manageable than any LLC created to manage financial assets; 
  • Ability to invest in virtually any asset class, including cryptocurrency;
  • Privacy. All micro-fund angel investors maintain confidentiality;
  • Tax transparency — meaning investors do not bear any additional taxes on top of capital gain taxes in their home country;
  • Ability to sell assets on the secondary market.

Risks and limitations associated with micro-funds

Like any other investment method, investing via micro-funds has disadvantages. We have identified the main weaknesses so  you can learn about all the pros and cons before making a decision. 

Disadvantages of micro-funds:

  • High costs and long iterations with regulators. It will be expensive if you want to set up a GP yourself,  but you can avoid high costs through the Uniborn platform. 
  • More sophisticated KYC and AML verification governed by EU laws. However, as mentioned earlier, this provides additional security both for the investors and the companies they invest in.
  • Not many providers. As opposed to SPVs, where tens of platforms provide SPV creation services, there are just a few platforms where you can create micro-funds (pst.. Uniborn is one of them).

SPV vs micro-fund: which one should you choose? 

To make it easier for you to decide, we have created a comparison table of SVPs and micro-funds according to the main criteria.

SPVs are suitable for:

  1. US investors and European single-country deals (local investors and local asset);
  2. Cases when you know the syndicate lead in person and have full trust;
  3. Standart deals with no special conditions;
  4. One or a few deals;
  5. The costs do not matter much.

Micro-funds are suitable for:

  1. Investors in any jurisdictions looking to avoid regulatory specifics and issues;
  2. Cases when you do not have full trust for the syndicate lead and want to mitigate risks;
  3. Deals with custom terms for specific investors and contributors tiers;
  4. Building a diversified portfolio;
  5. Every euro in fees counts.

If you have any questions about how to syndicate your first deal via micro-fund please get in touch with Dmitry Samoilovskikh, founder and CEO of Uniborn

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