5 SPV Structuring Mistakes Investors Make and How to Avoid Them

If you are a startup investor today, you are no stranger to Special Purpose Vehicles (SPVs). They are quick, flexible, and enable you to combine your funds to access deals that you might not be able to obtain on your own.

However, the truth that no one tells you upfront is that you end up doing a great deal. SPVs look simple on the surface, but the truth is they’re far more complex once you dig in.

A poorly structured SPV can quickly turn a promising investment into a compliance headache, a tax mess, or a strained relationship with founders and co-investors. If no one fixes the mistakes, new investment funds experience incorrectly organized SPVs once and avoid them afterward. The worst part is that these mistakes are entirely avoidable.

This blog will walk you through common mistakes in SPV structuring, the reasons behind these mistakes, and how you can avoid them—even if you are not a finance graduate. Consider it a handbook for investors before you enter the next deal you come across.

Now, let’s start.

Importance of SPVs Today and Going Forward

Before breaking down the mistakes, here's a quick refresher.

SPVs enable multiple parties to contribute funds to a single-purpose legal entity—typically an LLC—that invests in a startup. The start-up company will not have 20 angel investors but an SPV that represents the shareholders.

That makes it easier because:

• Investors put up smaller amounts.
  
• Startups dodge messy cap tables.
  
• Everyone gets aligned terms.
  
• Syndicate leads handle deal flow efficiently.
  

Yet, similar to any investment option, SPVs also involve rules, decisions, and risks. If you miss the point early, you might regret it later.

Let’s get to the SPV structuring mistakes and how you might avoid them.

1. Lack of Understanding of the Legal and Tax Aspects of SPVs

New investment groups tend to rush unthinkingly into SPVs due to the perception of a WhatsApp investment, but with proper documentation. That’s not the case. SPVs are a legal structure, such as an LLC or LLP.

This mistake occurs for a variety of reasons:

• Most SPV platforms streamline the user experience to such an extent that investors often assume everything is straightforward. That leads them to believe nothing complex is hiding beneath the surface.
  
• Everything appears automatic and plug-and-play friendly.
  

Risks of this mistake:

• You might wind up with tax documents you do not understand.
  
• The SPV may be required to register in a state with higher filing fees, which can affect your overall costs.
  
• You could be subject to unexpected partnership taxes.
  
• You could misunderstand the concept of “limited liability.”
  
• The IRS can send you tax forms at the worst possible time.
  

How to avoid this:

• Ask where the SPV is domiciled.
  
  • Delaware is common; other platforms operate in different states.
    
• Check the tax reporting structure.
  
  • What kind of tax form will you get? K-1? 1099? Others?
    
• Understand the liability.
  
  • An SPV shields your private property, but be aware of your obligations.
    
• Ask questions.
  
  • A good lead never gets annoyed when investors ask questions.
    

If you want to avoid surprises, you have to consider each SPV a mini-investment of itself, not merely a ‘vehicle.

2. Accepting Terms Without Reviewing the Operating Agreement

The operating agreement serves as the backbone of every SPV. It provides information on how the SPV functions, who makes decisions, and the procedures for exits. Many people ignore the operating agreement altogether.

Why This Error Exists:

• It’s very long and convoluted and seems unnecessary.
  
• Many people think: “I’m gonna put $5K into this platform. Do I really need to read the terms of service agreement?”
  

The answer: Yes, at least once.

Risks of this mistake:

• You may not be aware of who controls follow-up decisions.
  
• Charges may be unclear or misinterpreted.
  
• Voting rights may not be what you expect.
  
• Distributions may go through a waterfall you never agreed to.
  

How to avoid this:

• Read the operating agreement for each platform you sign up for.
  
  • Platforms mostly use the same template each time.
    
• Check for economic terms:
  
  • Carry (profit share)
    
  • Management fees
    
  • Admin fees
    
  • Expense reimbursement
    
• Check for governance terms:
  
  • Who represents the SPV on the Cap Table?
    
  • Who decides follow-on investment decisions?
    
• Communication:
  
  • You don’t need to memorize the agreement; just know what you’re signing.
    

3. Ignoring the Fee Structure and Thinking “Carry Is the Only Cost”

“Carry” is considered the only expense of the SPV; that is, the share of profits the lead takes when the investment exits. But SPVs involve various levels of costs.

The first mistake is ignoring these factors.

Why This Error Occurs:

• Marketing pages often advertise low or no-fee carry options.
  
• Much of the information is in the small print.
  

Consequences of the mistake:

• You may incur setup fees, administrative fees, annual maintenance fees, transaction fees, banking fees, and costs associated with preparing tax documents.
  
• High fees can significantly reduce your gains.
  
• You could compare prices incorrectly because charges vary among platforms.
  

How to avoid this:

• Ask for a clear breakdown of all fees before wiring funds.
  
  • Good leads will share this upfront.
    
• Compare platforms.
  
  • Some have one-time fees, others have annual maintenance fees.
    
• Understand the carry concept.
  
  • “Carry quality” matters; a bigger carry isn’t a bad thing if the lead brings a lot of value.
    

Remember: Cheap SPVs aren't necessarily the best. Transparent SPVs are always the best choice.

4. Lack of Understanding of Who Controls the SPV and the Decision-Making Process

The whole idea of an SPV is collective decision-making and centralized control. If you don’t know who controls the SPV and their level of power, you are flying blind.

This mistake occurs because:

• Investors often assume that SPVs imply equal voting rights; however, this is not always the case.
  

Risks of this error:

• You assume voting rights but do not have them.
  
• Updates may never arrive.
  
• Follow-ons may not align with your preference.
  
• You could misunderstand the timing of business closures or sales approvals.
  

The worst-case scenario? You are unhappy with a decision, but you cannot influence it.

How to avoid this:

• Find the lead or manager.
  
  • The name and capacity should be in the operating agreement.
    
• Clarify communication expectations.
  
  • What is the rate of updates?
    
• Review follow-on policies.
  
• Understand the representation rights of the SPV.
  
  • The SPV typically gets one seat and one shareholder vote—not individual investors.
  • SPVs are efficient because one representative acts on behalf of the group. Know who the representative is and their powers.

5. Participating in SPVs Without Understanding the Dilution Path of the Startup

That is the mistake that first-time angels make the most.

You can obtain the perfect SPV, but lose upside due to future dilution issues that you misunderstand.

This mistake occurs because:

• Investors consider SPVs a one-time investment. Startups go through multiple rounds:
  
  • Seed
  • Series A
  • Series B
  • Series C
  • Down rounds
  • Bridge rounds
  • Extensions

Each round affects your ultimate ownership.

Risks of this mistake:

• Overestimating future returns
  
• Misunderstanding pro-rata rights
  
• Not budgeting for further participation.
  
• SPV may lack the required capital and structure for ownership
  

Investors often assume the SPV automatically gets pro-rata rights, but these rights depend entirely on the deal terms.

What the problem is:

• Question whether the SPV has any pro-rata rights.
  
  • Not all investment agreements include these.
    
• Check if the lead plans follow-on SPVs.
  
  • Impacts long-term value.
    
• Understand expected dilution.
  
  • Startups and investment funds may provide dilution models.
    
• Plan your capital strategy for follow-ons.
  
  • Even small follow-ons can materially impact investment gains.
    

If you are SPV-investing long term, dilution competence is a priority.

Bonus: Who Is Involved In the Structuring of the SPV?

As many people have asked this question, here is the answer.

An SPV typically consists of:

• Syndicate Lead or Investment Manager – Manages the SPV, negotiates terms, and communicates with investors.
  
• SPV Platform/Admin Provider – Manages formation, compliance, tax return filings, and related back-office functions.
  
• Legal Counsel – Prepares corporate documents and analyzes deal terms.
  
• Banking/Custodian Partner – Manages fund transfers and custodial oversight.
  
• Investors – The LPs (limited partners) who contribute capital to the SPV.
  

Understanding the players and their actions prevents poor questioning and avoids SPV structuring mistakes caused by a lack of transparency

A Simple SPV Setup Guide for Investors

Before wiring funds into any investment, follow this step-by-step SPV setup guide for investors to help you identify potential blind spots and make informed investment decisions.

Step 1: Understand the Deal Structure

Start with the basics. All SPVs are structured—understand what you are getting into.

• Entity type: Is the SPV organized as LLC, LLP, or other? It affects your liability, tax situation, and the kind of return you will file at year-end.
  
• Jurisdiction: Which state is the SPV registered in? Delaware is popular, but states like Wyoming and Colorado may offer lower costs. Filing conditions and charges differ.
  
• Tax implications: Will you get a K-1? Is there international investment causing complications with filing? An early understanding of tax flow can prevent surprises.
  
• The operating agreement is “the playbook of the way the SPV functions.”
  
• "Skimming over the operating agreement is very tempting. Don’t."
  

Step 2: Review the Operating Agreement and Economic Terms

• What portion of the profit share does the lead take when exiting? When is it applied?
  
• Locate costs for setup, annual administration, tax preparation, and hidden charges that could lower your yield.
  
• Do you have voting rights, information rights, or the right to participate? It decides your level of involvement.
  
• Who makes follow-on decisions? Who signs for the SPV? Crucial for long-term transactions.
  

Step 3: Know Who Controls the SPV

You are trusting someone to speak on your behalf regarding your investment. Know exactly who that is.

• Lead’s role: What deals are they selecting? What are the deal terms? Any pro-rata issues?
  
• Update frequency: What kind of communication will you receive—quarterly updates? Only for significant changes? Site launch notices?
  
• Follow-on strategy: Is the lead planning other SPV deals for later rounds? What’s their plan for skip follow-ons? It impacts long-term ownership within the startup.
  

Step 4: Review the Fee Structure

Fee transparency is key. Unattractive fee structures can undermine even the best deals.

• Set up fee: Is a formation fee required? What is it for?
  
• Annual fee: Are there maintenance fees, especially if the exit takes time?
  
• Exit fee: Are there “back-end” charges when distributions are received? Platforms often hide these in the fine print.
  
• Tax reporting fee: What is the cost for preparing K-1 or annual reports—not just SPV or Investors? These add up over time.
  

Step 5: Dilution and Pro Rata Inquiry

SPVs are not over after the initial investment.

• Rights: Is the SPV entitled to its proportionate shares? Who distributes shares?
  
• Estimate: How often the startup intends to fundraise and what level of dilution you might see over 3-5 years.
  
• Long-term planning: Will you expect to participate in future SPVs? Budget for additional investments? Planning keeps you ahead of the taxman.

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Conclusion: Improve SPV Confidence Through Angel School

SPVs can be powerful tools for modern investors. They allow you

 to take advantage of excellent deals, participate in premium syndications, and invest modest amounts.

Nevertheless, SPVs involve responsibilities. The more you know, the better you'll make decisions, and the stronger your portfolio will be. If you want to get world-class at angel investing, check out the Syndicate Blueprint program at Angel School. It will provide you with the knowledge and tools to navigate the world of startup investing. 

To deepen your understanding of SPVs, deal structures, and startup investing, explore Angel School’s Syndicate Blueprint program and build long-term investing confidence.

FAQs

What are the most common mistakes in SPV investing?

Many investors overlook fees, governance rules, and tax reporting. These common mistakes in SPV participation can negatively impact returns if not addressed upfront.

How can I avoid SPV structuring mistakes?

Follow a clear checklist and review the operating agreement, fees, and lead responsibilities to ensure a smooth process. It helps you avoid most SPV structuring mistakes.

What should an SPV setup guide for investors include?

A comprehensive SPV setup guide for investors should cover entity type, jurisdiction, fee structure, decision-making processes, and expectations regarding dilution.

Why do investors need to review the SPV jurisdiction?

Jurisdiction affects taxes, compliance, and fees. Ignoring it is one of the common mistakes in SPV investing.

How can new investors better understand SPV terms?

Use a structured SPV setup guide for investors and clarify anything unclear with the lead or platform to avoid unnecessary SPV structuring mistakes.

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