- SPVs offer startups advantages, but are not the only solution for investors and risks.
- Internal project structuring can be cost-effective, but has disadvantages in terms of risk separation.
- Joint ventures enable the sharing of resources and financial risks between partners.
- Trust structures offer flexibility, but limited transparency and liability for investors.
- Contract-based cooperation is cost-efficient, but riskier in the event of disputes.
- Subsidiaries enable strategic integration, but require higher administrative costs.
- Crowdfunding can provide a broader basis for raising capital, but less capital.
Yesterday I published the article Project companies and SPVs in the startup sector: Structuring, advantages and legal challenges. In it, I highlighted the advantages and challenges of special purpose vehicles (SPVs) for startups and showed how these structures can be used in a targeted manner to attract investors and minimize risks. However, SPVs are not always the best or only solution. Depending on the business model, financing requirements and legal framework, other alternatives may also make sense.
In this article, I present various alternatives to SPVs that startups can consider if they want to structure projects, involve investors or isolate risks. Each of these options comes with specific advantages and disadvantages that should be carefully considered.
Internal project structuring within the existing company
Instead of founding a separate company, start-ups can also structure projects internally by 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 separate 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. A separate company is often founded, which is operated jointly by the partners. Compared to a pure SPV, a JV offers the advantage that several 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 start-up in the field of artificial intelligence founds a joint venture with an established IT company to develop a new platform. Both partners contribute capital and technical expertise, while the risks are shared.
Use of trust structures
Trust models offer a way of managing assets or projects in a legally separate manner without setting up a separate company. A trustee is appointed to manage the project or certain 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 setting up their own company, start-ups can also rely on contractual cooperation 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 concludes a cooperation agreement with an external development team to create a new software solution. The revenue from the sale of the software is split in accordance with the contractual agreement.
Use of subsidiaries instead of SPVs
Instead of an SPV set up specifically for a project, a regular subsidiary can also be used, which remains integrated into the company portfolio in the long term. This makes particular sense if the project is strategically important and is to be operated on a long-term basis.
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 founds a subsidiary for the development of a new payment platform. The subsidiary remains part of the group of companies in the long term and may later be spun off or sold.
Crowdfunding platforms as an alternative to direct participation
Crowdfunding can also be an alternative for start-ups that need capital for specific projects. Here, capital is collected from many small investors without them having to directly acquire 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: Which structure is best?
The choice of the right structure depends largely on the individual requirements of the startup – including the project itself, the desired risk distribution and the target group of investors. While SPVs can be an effective solution in many cases, there are numerous alternatives such as internal structures, joint ventures or trust models that may make more sense depending on the context.
As a lawyer specializing in corporate law, I support start-ups in finding the right structure for their projects and implementing it in a legally compliant manner – be it by founding an SPV or through 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!
