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💰Employee Liquidity via SPVs & The SPV into SPV Craze

We’re excited to dive deep into two rapidly growing trends in the Syndicate ecosystem that are generating an enormous amount of interest from both GPs and LPs.

1. Employee liquidity via SPVs → Using secondary transactions to buy early investor, employee, and founder shares 

2. The growing popularity of SPV into SPV Investing → How it works and why it’s getting tons of recent attention

Let’s get into it!

Employee Liquidity via SPVs 

First, I want to explain why syndicates can be a great and growing route for early employee liquidity. The SPV’s that we typically run (regardless of deal stage) are typically between $75k to $500k. This is largely due to 1) the volume of deals we’re running (between Zach & I, over 150 SPV opportunities a year) and 2) our investor base is primarily made up of accredited retail investors.

Shares of late-stage startups are typically only sold in blocks worth several million (or even tens of millions) of dollars. With companies staying private longer, it’s increasingly common that early employees/founders, and some pre-seed or seed investors will look to liquidate partial positions as the company reaches growth rounds.  Given the size of these share blocks, it’s unlikely an individual syndicate lead can raise enough capital to purchase the entire block size which can be $10M to $50M in the high cases.

Enter early employee shares.

Early employees tend to have a smaller number of shares that better align with the amount of capital typically raised via an SPV. It’s important to note these are typically common shares and not preferred that investors would typically get; however, as a syndicate lead, it is:

1. Easier to transact with early employees (vs. VCs) given they might be looking to sell $100k to $1M worth of shares 

2. Syndicates can move quickly and overall be a great liquidity partner for this process

Many early employees joined some fast growth startup 3-5-8 years ago and have been heads down building over the years trying to take the company to IPO. Notably, Stripe was founded 14 years ago and is still private…That’s a long time for an early employee to be holding private shares without any options for liquidity, especially when juxtaposed with public company employees (say Facebook, NVIDIA, Google…), whose shares vest and may generate significant liquidity. Startup employees need liquidity options to buy a house, start a family, diversify equity, emergencies that arise, and all sorts of other reasons people need or want cash/liquidity.

While many employees have liquidity needs, most are not sure where to find a buyer and actually get the cash. Most startups are not buying back shares from employees, so that’s typically not an option. Notably, it is becoming slightly more common for the pre-IPO companies to offer tenders with SpaceX, as one example, holding tender offers twice a year for employees, but it’s still not the norm. In some cases, there might be an existing investor or a secondary-focused fund that is looking for equity and is willing to buy common shares, but for employees, it’s difficult to access these networks at the right time. Additionally, because their liquidity needs are relatively small, large institutions typically aren’t motivated to transact with early startup employee. 

Enter Syndicates!

If you are an early employee that owns shares amounting to over $1M in private markets but are looking to liquidate $100k, $500k or even $1M+, syndicate leads can be a great fit as these are more aligned block sizes with our typical capital raise. 

For example, in 2024, I (Alex) have done secondary transactions that raised the following amounts of capital:

• Company 1: $750k

• Company 2: $341k

• Company 3: $480k

• Company 4: 3 different transactions amounting to $1.15M in total

• Company 5: $375k

• Company 6: $203k

• Company 7: 3 different transactions amounting to ~$650k in total

• Company 8: over $1M

• Company 9: $130k

• Company 10: over $1M

• Company 11: 4 different transactions amounting to $1.2M in total

As a potential seller, it’s important to understand the nuances of the secondary transaction process. We recently covered this topic.

Hopefully the above provides more clarity on the exact SPV sizes we are typically running. As stated in a previous LMI piece “Breaking Down the Secondary Transaction in Venture Capital”, brokers and marketplaces can play a key role here. We’re actively working with Forge, Hiive, Setter and other brokers in the space who are actively in touch with various sellers including early employees searching for buyers. The brokers play a key role in executing transactions in the secondary market. 

The Popularity of SPV into SPV Investing

This leads into our second, related topic: the growing popularity of SPV into SPV (or “pass-through SPV”) investing. It’s becoming difficult to get access to some of the most exciting late-stage startup opportunities with check sizes <$20M, which makes it near impossible for a syndicate lead to get access. This has led to the rise of SPV into SPV investing or double layer SPVs where the first layer SPV that is direct on cap table is pooling smaller second layer SPVs. This has existed, but in the past year, SPV into SPV activity has exploded. 

Sydecar’s platform has experienced tremendous growth on their platform for these Pass-Through SPVs and recently published an educational piece you can check out titled “Pass-Through SPVs: The Emerging VC Strategy for Hot Deals” While other major fund admin’s have halted support for these structures, Sydecar has double downed on supporting these. If you’re a GP raising, we recommend using Sydecar - they have a fluid process to help GPs get these pass through SPVs approved quickly and inexpensively. We use Sydecar for many of these offerings. 

What does that actually mean?

Let’s say I want access to Company A; Company A unfortunately isn’t letting <$50M checks on the cap table, making a direct investment in-accessible for me. However, I know a venture fund that has access to this opportunity and is able to pool together the minimum $50M to invest in the company directly and is willing to syndicate out part of his/her allocation to me. I can bring that opportunity to  my individual accredited investors, pool together my capital into an SPV that invests into the large institution’s underlying SPV, which then invests directly on Company A’s cap table.

The double-layer SPV is a bit more complicated than a single layer SPV, but for many hot, later-stage companies, this is really the only way for individual investors to get exposure ahead of an IPO. This is in my opinion a large reason why this has become so popular so quickly. Again, it’s more complicated for an individual investor, but I am not aware of another way (for individuals) to invest in SpaceX, xAI, OpenAI, etc. ahead of an IPO.

As stated in Techcrunch’s recent piece titled “VCs are selling shares of hot AI companies like Anthropic and xAI to small investors in a wild SPV market”: 

“Sometimes SPVs are created in association with primary rounds of companies still in fundraising mode. That means that the small investors can get in on a startup, or a coveted private company, at the same time the major investors do.”

In Sydecar’s recent piece, they highlight why there is this heightened popularity from Emerging Managers of Pass-Through SPVs, including:

1. Access → Emerging managers struggle to meet the high minimum check sizes required for these coveted deals. By sourcing allocations through larger firms' SPVs, which might have $10-50M already secured, they can participate without needing to secure massive capital commitments or get a direct cap table allocation.

2. Investor Demand for Later Stage/More Liquid Deals → investors are pushing for later-stage investments with higher liquidity potential due to recent record-low returns in venture capital.

3. Fund Size & Portfolio Construction → Pass-through SPVs allow emerging managers to participate in larger funding rounds without coming up against certain portfolio construction limitations. Standard operating agreements often limit the amount of capital from a fund that can be invested in a single portfolio company. However, SPVs allow managers to raise substantial capital through a sidecar vehicle, avoiding limitations that exist for their flagship fund. 

Let’s further break down the Pros & Cons below of SPVs into SPVs for the investors:

Pros:

• Enables retail accredited access to companies like Anthropic, SpaceX, X.ai etc with checks as low as $5k.

• The double layer structure allows for more flexibility in terms of who can invest in each layer. The top layer SPV can have different investment criteria compared to the lower layer SPV holding the asset which can be useful for attracting a wider range of investors.

• You are investing at the same valuation as others participating in the primary (often) 

• Lack of alternative ways to access these companies as an individual 

Cons:

• You lack information rights as you're investing in an entity that likely doesn’t have direct access to the company. I would not expect to get any company updates. As mentioned in the same aforementioned TechCrunch article: “While SPVs may be a suitable mechanism for buying shares of hot companies not available to investors by any other means, some investors warn that it comes with high risk. Unlike venture funds, backers of SPVs don’t receive direct information on the companies.”

• Double Layer Fees → SPV’s often don’t charge management fees, but for double layer SPVs GPs do given the difficulty the burden to run these vehicles and difficulty accessing these names; so there may be a scenario where LPs are paying two layers of fees, making this expensive as a syndicate LP. 

  • **I will note that most of the time, the syndicate lead and underlying SPV really just reduce economics or split them so no syndicate LP pays above 2% management fee and 20% carry.

• Terms may be misstated by the underlying GP, leading to problems down the line. 

• With multiple layers, there's a risk of misalignment of interests between the different parties involved. The managers of the upper SPV might not always prioritize the best interests of the investors in the lower SPV holding the asset.

  • E.g. I might invest a $1M SPV into a $30M SPV that goes direct, but I will not have rights/any say into selling early or decision making on future liquidity opportunities. The syndicate lead (who invested in the underlying SPV) and the LPs are essentially along for the ride and partnered up with the underlying SPV GP’s.

So while investing into SPVs can provide access to compelling investment opportunities, please only work with GPs you trust given the additional risks involved in these transactions.

If you enjoyed, this article, feel free to view our other articles related to secondary transactions: 

• 🔍🚨Buyer Beware: Navigating the Secondary Market

• Breaking Down the Secondary Transaction in Venture Capital

• Carta Scrapped Secondaries – Good News, You Can Still Access the Secondary Ecosystem

• 📈 The Market Resurgence of Secondary Investments in Venture Capital

Last Money in is Powered by Sydecar

Sydecar empowers syndicate leads to manage their investments more effectively. Organize, manage, and engage your investor network effortlessly with Sydecar’s management and communication tools. Their platform also automates banking, compliance, contracts, tax, and reporting, freeing up syndicate leads to focus on securing deals and strengthening investor relations. Elevate your syndicate operations with Sydecar.

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✍️ Written by Zachary and Alex