SPVs vs. Direct Investment: What’s Best for Friends & Family Rounds?

Introduction

When raising startup funding from friends and family, founders face a critical decision: accept direct investments or structure the round through a Special Purpose Vehicle (SPV). This choice impacts everything from cap table management to investor relations and even your ability to secure future venture capital funding.

While direct investment in startups might seem simpler at first, SPV fundraising structures offer distinct advantages that can benefit both founders and early-stage investors, especially when dealing with multiple small checks in a friends and family round.

What is an SPV and Why Use One?

A Special Purpose Vehicle (SPV) is a legal entity (typically an LLC or limited partnership) created specifically to pool capital from multiple investors for a single investment in a startup.

Unlike direct investments, where each angel or small investor appears individually on your startup’s cap table, an SPV consolidates all participants into a single entity. This structure creates a clean separation between the operating company and the investment vehicle, allowing founders to maintain a streamlined cap table while still accepting capital from numerous backers. SPVs essentially function as a middleman that holds shares on behalf of the underlying investors, creating administrative efficiency while maintaining legal clarity.

Benefits of SPVs for Founders

For startup founders, an SPV for fundraising transforms the headache of managing dozens of small checks into the simplicity of dealing with a single entity. This streamlined cap table makes your company more attractive to future institutional investors who typically prefer cleaner ownership structures. Communication becomes more efficient as updates, documents, and voting matters can be directed to the SPV manager rather than coordinating with each individual investor. This structure also provides flexibility in setting investment minimums that might otherwise exclude smaller supporters.

Benefits of SPVs for Small Investors

Small check writers gain several advantages through SPV participation. Most importantly, they get access to deals that might otherwise be inaccessible due to high minimum investment requirements. The SPV structure also provides these investors with professionally negotiated terms that individual small investors typically lack the leverage to secure. They benefit from proper documentation and standardized investment terms rather than potentially problematic “handshake deals.” Additionally, the SPV manager handles administrative matters, providing a layer of professionalism and reducing the direct burden on less experienced investors while still allowing them to participate in the investment.

Conclusion

For most founders raising from friends, family, and small check investors, SPVs offer compelling advantages over direct investments despite the additional upfront costs. They create long-term efficiency, protect relationships, and position your company for future fundraising success.

Blechynden Legal advises founders, startups, and investors on SPV structures, cap table management, and venture capital transactions. Contact us today to discuss your fundraising strategy.

Disclaimer

This article is for general informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by reading or interacting with this content. Always consult with a qualified attorney regarding your specific legal needs.