Before You Launch an SPV | The Private Markets Playbook - Sydecar

Before You Launch an SPV

The legal, structural, and regulatory foundations for running SPVs.

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Are You Ready to Launch an SPV? Find Out in 2 Minutes

Use Sydecar's SPV Readiness Quiz to ensure you're ready to move at the speed of the deal and prevent any operational delays.

3(c)(1) vs. 3(c)(7): What Every SPV Manager Needs to Know

Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act of 1940 (ICA) let special purpose vehicles (SPVs) and private funds operate without Securities and Exchange Commission (SEC) registration.

A Guide to Co-Syndication

Co-syndication occurs when two or more syndicate leads team up to run a single SPV, combining their LP networks and sharing economics.

A Guide to Layered SPVs

Layered SPVs are structures that allow emerging managers to access high-demand deals by investing through other SPVs.

A Guide to Legal and Regulatory Compliance for VCs

Venture fund managers must navigate several core U.S. regulatory regimes, including the Securities Act of 1933, the Investment Company Act of 1940, and the Investment Advisers Act of 1940.

A Guide to Management Companies

A management company is a separate entity, often an LLC, that handles the operations of a venture fund, including fees, expenses, and regulatory filings.

A Guide to PFIC

Passive Foreign Investment Companies (PFICs) are non-U.S. corporations that meet specific income or asset tests tied to passive income.

A Guide to Secondary Transactions

Secondary transactions allow investors to buy or sell startup equity outside of a traditional exit, offering liquidity in an otherwise illiquid asset class.

A Guide to Term Sheets

A term sheet is a document that outlines the key terms of a proposed investment from a venture capital firm into a startup that is raising capital. It serves as a starting point for negotiating the details of the investment before drafting binding legal agreements.

Breaking Down a Term Sheet

A term sheet serves as a framework for investment negotiations, outlining financial and operational terms that can shape the company’s growth, decision-making structure, and potential outcomes in future funding rounds or exits.

To evaluate a term sheet effectively, VCs should be mindful of several critical areas:

• Valuation & Ownership: How much is the company worth, and what percentage will the investor own?
• Investor Protections: What rights does the investor have in decision-making, liquidation, or future fundraising rounds?
• Governance & Control: How will board seats be allocated, and who has voting power over key company decisions?
• Exit & Liquidity Terms: What happens in the event of an acquisition, IPO, or another exit scenario?

Are Term Sheets Legally Binding?

Most aspects of a term sheet are non-binding, meaning either party can walk away before finalizing legal agreements. However, certain provisions, such as confidentiality clauses and exclusivity clauses, may be legally enforceable.

Common Terms Found in a VC Term Sheet

1. Investment Terms: Specific terms depend on the type of security being acquired.
2. Liquidation Preference: Investors holding preferred shares typically receive their investment back before common shareholders in a liquidity event.
3. Equity Conversion: Preferred shares generally convert into common stock.
4. Anti-Dilution Protections: Provisions ensure the investor’s ownership percentage doesn’t shrink unfairly.
5. Investor Participation in Future Rounds: Some term sheets require investors to participate in subsequent funding rounds to retain their preferred stock.
6. Board Structure: Dictates how board seats are divided among founders, investors, and independent members.
7. Voting Rights: Often negotiated to give investors a say in major decisions based on their ownership percentage.
8. Dividend Policies: Some term sheets include cumulative or non-cumulative dividends.
9. Drag-Along Rights: Allows investors to force all shareholders to sell the company if certain conditions are met.
10. Use of Proceeds: Outlines how the invested capital will be allocated.

Are There Standard VC Term Sheets?

Venture capital term sheets have become more concise, with a growing emphasis on transparency and clear definitions. Y Combinator has published a recommended term sheet template reflecting common industry standards: Y Combinator Term Sheet

What Does Sydecar Look For in a Term Sheet?

When clients share a term sheet with Sydecar, we review it for specific operational alignment focusing on two core areas:

• Platform Compatibility: We confirm that the proposed investment is something Sydecar can support.
• Product Consistency: We verify the deal details input into the Sydecar platform match the source documentation.