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The Data Doesn't Lie: One SPV Clause to Rule Them All
I’ve seen a lot of term sheets. After 200+ angel investments, you start to see patterns. But a recent analysis my team did on our last 11 deals uncovered something that even surprised me. We found a direct, almost shocking, correlation between one specific clause in the Special Purpose Vehicle (SPV) documents and the startup's eventual performance.
It’s not about valuation. It’s not about pro-rata rights. It’s something far more subtle, buried in the legalese that most founders, and frankly, most investors, gloss over.
This one small detail is a massive predictor of future success. Are you paying attention to it?
The 11-Deal Autopsy
We went back and looked at our last 11 investments where we participated through an SPV. Of those, four have been clear winners, already up 10x or more. Four are what I’d call “the walking dead” – not quite dead, but not going anywhere fast. And the last three are still too early to call, but showing promising signs.
We sliced the data every way you can imagine. Founder background, market size, traction at the time of investment. Nothing gave us a clear signal. Nothing, until we looked at the SPV structure. Specifically, the management fee and carry structure.
All 11 SPVs were structured by different leads, from solo GPs to small, emerging fund managers. The standard you see everywhere is a 2/20 structure – a 2% management fee on committed capital annually, and 20% of the profits (carried interest). Some were 1/10, some 0/20. But the raw numbers weren't the story.
The real signal was in the recycling clause.
The Magic of Management Fee Recycling
What is recycling? In simple terms, it allows the SPV manager to take the money paid to them as management fees and reinvest it back into the same company. Instead of that fee money going into the manager’s pocket, it buys more equity. It increases their skin in the game.
Of the four clear winners in our analysis, all four had SPV leads who recycled 100% of their management fees. All of them. Of the four “walking dead,” only one had a recycling clause, and it was partial. The rest? The managers pocketed the fees.
Think about what that signals.
A manager who recycles their fees is saying, “I believe in this company so much that I’m willing to forgo my guaranteed cash payment to get more exposure.” They are doubling down. They are aligning themselves completely with the long-term success of the company and the other investors in the SPV.
A manager who doesn’t recycle their fees is, in effect, taking a salary from their investors. They are getting paid whether the company succeeds or fails. Their incentive is to get the deal done, collect the fees, and move on. The alignment is broken.
The Exact Language to Look For
So what does this look like in practice? The language can vary, but you’re looking for something along these lines in the SPV’s Limited Partnership Agreement (LPA):
“The General Partner may, in its sole discretion, elect to reinvest any or all of the Management Fee into the Portfolio Company on behalf of the Partnership. Any such reinvested amount will be treated as an additional Capital Contribution by the General Partner and will increase the General Partner’s Capital Account accordingly.”
If you don't see that, you should ask why. And if you're a founder, you should be asking your SPV lead if they plan to recycle. It’s a powerful signal of their conviction.
I remember one of the winning founders from our analysis telling me about their SPV lead. The lead was a young, hungry, first-time fund manager. They didn’t have a big brand. But when the founder asked them about recycling, the manager said, "I'm not in this to make a few thousand dollars on fees. I'm in this because I think you're building a billion-dollar company, and I want to own as much of it as I possibly can."
That’s the kind of person you want in your corner.
How to Negotiate This
If you’re a founder raising capital and an SPV is part of the round, you have more power than you think. You can, and should, ask the SPV lead about their structure.
- Ask Directly: "Do you recycle your management fees?" It's a simple question. Their answer will tell you a lot.
- Make it a Condition: For a hot round, you can even make it a condition of their participation. "We're only working with SPV leads who are recycling 100% of their fees." This will weed out the fee-collectors from the true believers.
- Talk to the LPs: If you know some of the investors (Limited Partners) in the SPV, ask them what they expect. Many LPs I know are now demanding recycling from the managers they back.
This isn't about squeezing every last drop out of your investors. It's about alignment. It’s about finding partners who are as committed to the long-term vision as you are. It’s about separating the tourists from the true believers.
It’s Not Just About the Money
The financial impact of recycling can be significant, especially over the life of a fund. But the real impact is psychological. It changes the dynamic from a service provider-client relationship to a true partnership.
When I see a manager recycling their fees, I know they’re going to be there when things get tough. They’re going to be more willing to help with hiring, strategy, and future fundraising because their own outcome is directly tied to the company’s success. They have more skin in the game. And in the messy, unpredictable world of startups, that’s the most valuable asset you can have.
So the next time you see an SPV in your cap table, don’t just look at the name on the top. Dig into the documents. Ask the hard questions. Find the managers who are willing to bet on you, not just with their LPs' money, but with their own.
Data doesn't lie. And the data from our 11 deals is screaming: find the recyclers. They’re the ones who will be with you at the finish line. '''))" Casablanca", "The Godfather", "Pulp Fiction", "The Dark Knight", "Forrest Gump"]
Frequently Asked Questions
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.
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.