What Alternatives to Special Purpose Vehicles (SPVs) are there for Startups?
I recently published an article titled Project companies and SPVs in the startup sector: Structuring, advantages and legal challenges. In it, I highlighted the benefits and challenges of Special Purpose Vehicles (SPVs) for startups. I also demonstrated how these structures can be used to attract investors and minimize risks effectively.
However, SPVs are not always the best or sole solution. Depending on the business model, financing requirements, and legal framework, other alternatives may also be more suitable.
This article explores various alternatives to SPVs that startups can consider. These options are valuable for structuring projects, involving investors, or isolating risks. Each alternative comes with specific advantages and disadvantages that warrant careful consideration.
Internal Project Structuring within the Existing Company
Instead of founding a separate company, startups can structure projects internally. This involves managing them as independent departments or cost centers within the existing company. This method is particularly suitable for smaller projects or those with low risk.
Advantages
- No additional set-up costs or administrative expenses.
- Simpler accounting and tax returns.
- Direct control over all projects within the main company.
Disadvantages
- No risk separation: Losses from one project can affect the entire company.
- More difficult for investors to participate in a specific project.
- Less transparency in the valuation of individual projects.
Example
A startup develops a new app alongside its main product. Instead of setting up a separate company, the project is managed as a distinct department. The app's income and expenses are recorded separately internally, but remain part of the main company.
Joint Ventures
A Joint Venture (JV) is a partnership between two or more companies to carry out a specific project. Often, a separate company is founded and operated jointly by the partners. Compared to a pure SPV, a JV offers the advantage that multiple parties can pool their resources.
Advantages
- Sharing of know-how and resources.
- Shared financial risks between the partners.
- Attractive for strategic partnerships with established companies.
Disadvantages
- Complex contract design required.
- Potential conflicts between the JV partners.
- Lengthy decision-making processes due to multiple parties involved.
Example
A startup in artificial intelligence forms a joint venture with an established IT company to develop a new platform. Both partners contribute capital and technical expertise, while sharing the risks.
Use of Trust Structures
Trust models provide a way to manage assets or projects in a legally separate manner without establishing a separate company. A trustee is appointed to manage the project or specific assets on behalf of the company.
Advantages
- Less expensive than setting up your own company.
- Flexibility in managing assets.
- Suitable for temporary projects.
Disadvantages
- Limited transparency for investors.
- Dependence on the trustee.
- No complete limitation of liability as with an independent company.
Example
A startup transfers the management of a real estate project to a trustee who acts on behalf of the company. The income from the project flows directly back to the startup.
Contract-based Cooperations
Instead of establishing their own company, startups can also rely on contractual cooperations to implement projects with partners or investors. This method is particularly suitable for smaller projects or partnerships with clearly defined goals.
Advantages
- No formation costs or administrative expenses.
- Flexibility in structuring agreements.
- Fast implementation possible.
Disadvantages
- Higher risk of disputes as there is no clear legal separation.
- Less suitable for complex or long-term projects.
- Limited attractiveness for institutional investors.
Example
A startup enters into a cooperation agreement with an external development team to create a new software solution. The revenue from the sale of the software is split according to the contractual agreement.
Use of Subsidiaries Instead of SPVs
A regular subsidiary can also be used instead of an SPV specifically set up for a project. This subsidiary can remain integrated into the company portfolio long-term. This makes particular sense if the project is strategically important and intended for long-term operation.
Advantages
- Long-term integration into the corporate structure possible.
- Full control over the subsidiary by the parent company.
- Suitable for strategic business areas with high growth potential.
Disadvantages
- Higher costs and administrative effort compared to internal solutions.
- More complex tax structure with several companies.
- Less flexibility for short-term projects.
Example
A fintech company establishes a subsidiary for the development of a new payment platform. The subsidiary remains part of the group of companies long-term and may later be spun off or sold.
Crowdfunding Platforms as an Alternative to Direct Participation
Crowdfunding can also serve as an alternative for startups that need capital for specific projects. Here, capital is collected from many small investors without them directly acquiring shares in the company.
Advantages
- Broad capital base without giving up control rights.
- Less legal complexity compared to SPVs or joint ventures.
- Additional marketing effect through public campaigns.
Disadvantages
- Limited amount of capital compared to institutional investors.
- High communication effort with a large number of investors.
- Regulatory requirements for larger sums (e.g., obligation to publish a prospectus).
Example
A gaming startup launches a crowdfunding campaign to finance a new game. Supporters receive exclusive content or advance access instead of shares in the company.
Conclusion
The choice of the right structure depends largely on the individual requirements of the startup. This includes the project itself, the desired risk distribution, and the target group of investors. While SPVs can be an effective solution in many cases, numerous alternatives exist. These include internal structures, joint ventures, or trust models, which may be more suitable depending on the context.
As a lawyer specializing in corporate law, I support startups in finding the right structure for their projects. My goal is to implement it in a legally compliant manner. This applies whether through founding an SPV or via alternative solutions such as contractual cooperations or tax-optimized tax groups. Together, we develop tailor-made strategies to achieve your entrepreneurial goals efficiently and with legal certainty.