How to get a big upside in your company's exit: the employee's guide.

Background

Vauban has been keeping a strong emphasis on its product and execution, and for the moment, our marketing and PR has been limited. When someone writes about us, we generally become aware of it pretty quickly. Someone reached out to us recently, saying that they’d heard about us on the blog of Harvey Multani. Reading through this blog, we noticed that it was all centred upon a concept called the employee led-SPV, which we had never heard of before. We had to get on a call to learn more. If you are an employee at an early stage startup you believe in, you might enjoy learning more about the concept.

Employee-Led SPVs

An employee-led SPV is created by an employee for the purpose of investing in his or her employer. It is a way for employees of startups to enjoy their employers’ success in a more direct way than stock options permit. How? Employees do this by investing their close network money and collecting a carried interest (i.e., a performance fee).

How does this work from an employee’s perspective?


Let’s say you are working for a startup you enjoy and think it will become huge in the future.

  1. Ask the founder(s) of the startup for an allocation in their next funding round.
  2. Find investors in your network who are willing to invest in your employer.
  3. Get them to invest through an SPV. (We can help with this; we only charge a fee to the SPV if you close, so you’re not taking any risk of absorbing the cost.)
  4. You can repeat this for every round your company makes through your follow-on allocation or a new SPV.

What if more than one employee is looking to create an employee-led SPV?

There are several options to accommodate this.

  1. Create one SPV per employee: This is a more straightforward classic approach, but it means that each employee needs to bring enough capital to cover the cost of one SPV and make it worth it.
  2. Create one SPV for all employees and split the carry proportionally to the investments brought: This is a tad more complex, but you mutualise the cost of one SPV across all employees. Something to note is that this approach is more likely to be regulated, so always check the securities law of your country.

What Type of Investors Should an Employee Approach?

We recommend sticking to one employee’s close network of HNW and family offices. There are several reasons for that.

  • Although carried interests are legion in the industry, most VCs will refuse to pay one arguing they will have found out about your employer anyway since deal-flow is their job and also that they are writing checks large enough to be considered as a direct investor. Generally, this type of employee-led SPV targets HNW and family offices in your network more than venture capital funds.
  • While you should be able to create a syndicate with friends to invest in a startup without any regulatory approval in a lot of jurisdictions, investment promotion is highly regulated in most jurisdictions.

Benefits

What Are the Benefits for the Employee(s)?

  • You get a carried interest. Essentially, you will win 20% of any money the SPV (and, therefore, the investors) makes on an exit. In most cases, this will represent significantly more than the exposure you have to your employer through stock options (if you have any). For example if you syndicate $150k through your network in a $5m valuation early-stage round and that the startup later exits at a valuation of $100m, the investors of your SPV would get back $2,550,000 ($150k + 80% of gains) and you would get $450,000. 
  • It aligns your interests with those of your employer and makes your work much more meaningful.

What Are the Benefits for the Employer?

  • It helps kick-start your fundraising. In addition to bringing money, having some employees invested sends an excellent message to the market. Vauban has several employees who invested their own money, and this definitely was seen as a plus by VCs. 
  • It helps increase employee loyalty and retention.
  • Employees will think more like owners and work toward maximising longer term valuation over shorter term profits.

Next Steps

What Type of SPV Should Be Used?

Again, for simplicity and regulatory reasons, we recommend using a syndicate structure where voting rights and day-to-day management are shared with investors, like the Self-Managed LLP (for international startups) or the EIS Nominee Structure (for British startups). Traditional Partnership SPVs are more expensive and target regulated investment managers.

How to get started?

While this concept was born in Silicon Valley where equity has always been more sought after than in Europe by startup employees, Vauban is proud to facilitate the Employee-led SPV in the UK, in Europe and internationally generally. 

Vauban has transformed the process of setting up and closing a SPV from a highly archaic, slow and expensive journey into blazing-fast digital one.

Feel free to reach out if you think we could help you build an Employee-led SPV.