The SPV Shell Game: What Your VC Isn't Telling You
I remember the first time a VC told me they were putting together an SPV for my company. I smiled, nodded, and said, "That's great!" Then I immediately walked back to my desk and frantically Googled "What is an SPV?"
I was a founder. I was supposed to know these things. But the truth is, most of us are in the dark. We're so focused on building our product and hiring a team that we treat the financing details as an afterthought. That's a mistake. And it's a mistake that can cost you millions.
I’ve been on both sides of the table now. I’ve raised money as a founder for two companies that exited, and I’ve invested in over 200 startups, including giants like Anthropic and OpenAI. I’ve seen the VC playbook from the inside. I’m here to tell you what they’re really thinking when they send you that SPV document.
What is an SPV, Anyway?
Let's get the jargon out of the way. SPV stands for Special Purpose Vehicle. Think of it as a mini-fund created for one reason and one reason only: to invest in your company. Your main VC fund (the one that led your seed round) will create this separate entity, pool money from their own investors (Limited Partners or LPs), and then write you a single check from that SPV.
On the surface, it seems clean and simple. And that's what they want you to think. But the simplicity hides a lot of complexity that almost always benefits the investor, not you.
The Pro-Rata Lie
One of the first things a VC will tell you is that the SPV is just to "fill out their pro-rata rights." Pro-rata rights give an investor the ability to maintain their ownership percentage in future funding rounds. If they own 10% of your company after the seed round, they have the right to buy 10% of the Series A.
Here’s the secret: The SPV is often a way for them to do more than just their pro-rata. They might not have enough capital left in their main fund, or they want to give their own LPs a chance to double-down on a winner. So they create an SPV to bring in fresh cash. This isn't necessarily a bad thing, but it changes the dynamic. They aren't just maintaining their position; they are actively increasing their stake and their influence.
I once had a VC tell me they were "just exercising their pro-rata" via an SPV. When I dug into the numbers, they were actually increasing their ownership by 50%. They weren't lying, but they weren't telling the whole truth. They were playing a different game.
The 2 and 20 Trap
VCs make money in two ways: a 2% management fee on the total fund size and 20% of the profits (the "carry"). Guess what? The same often applies to SPVs.
Let's say a VC creates a $2 million SPV to invest in your Series A. They could be charging their LPs a 2% management fee ($40,000 per year) and taking a 20% carry on the profits from that SPV. It's a fund within a fund. They are making money on top of the money they are investing in you.
This is where it gets tricky for you, the founder. You need to ask who is paying those fees. Is it coming out of the investment in your company? Is it diluting you further? The document might be dense and legalistic, but you have to find the answer. Don't assume the VC is doing it out of the goodness of their heart. They are running a business.
Control is the Name of the Game
An SPV can also be a subtle power play. A VC might use an SPV to consolidate a group of smaller angel investors. Instead of having 10 angels on your cap table, you now have one SPV. It looks cleaner, right?
But now, instead of 10 individual voices, you have one person—the VC managing the SPV—who controls that entire block of votes. They just amplified their influence without buying a single additional share. They can now swing key decisions, from board seats to acquisition offers. They are playing chess while you are playing checkers.
Your Counter-Playbook
So what do you do? You can't just say no to the money. But you don't have to be a pawn in their game either. It's time you had your own playbook.
1. Ask the Hard Questions.
When your VC brings up an SPV, it's your turn to interview them. Here are the questions you need to ask:
- "Can you walk me through the economics of the SPV? What are the management fees and carry?"
- "Who are the LPs in this SPV? Are they existing investors in your fund?"
- "Is this purely for your pro-rata, or are you increasing your ownership stake?"
- "How will the voting rights of the SPV be handled?"
Their answers will tell you everything you need to know about their true intentions.
2. Negotiate Everything.
The terms of an SPV are not set in stone. They are a negotiation. You can push back. If they are charging a high management fee, ask them to reduce it or waive it entirely. If they are taking a 20% carry, see if you can negotiate it down to 15%. Remember, they want to get into your deal. You have more power than you think.
3. The Power of "No".
Sometimes, the best move is to walk away. If the terms are predatory or if the VC is being evasive, you can say no. It might feel terrifying to turn down money, but taking money on bad terms can be a death sentence for your company. There is always another investor. There is always another way.
I once advised a founder to turn down an SPV from a very well-known VC. The terms were just awful. The founder was scared, but he did it. Three weeks later, he closed a round with a different investor on much better terms. Saying no was the best decision he ever made.
Don't Be a Sucker
Look, SPVs are a tool. Like any tool, they can be used for good or for bad. They can help you fill out a round and bring in strategic capital. Or they can be used to dilute you, strip you of control, and make your investors rich at your expense.
Your job is to know the difference. Your VC has a playbook. They know the angles. They know the unspoken rules. It's time you did too. Don't just focus on building a great product. Understand the game you are playing. Your equity, and your company's future, depends on it.
Frequently Asked Questions
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.