Twelve questions before you join an SPV

An SPV can make a private company investment administratively accessible, but convenience is not the same as transparent economics or suitable risk. The following twelve questions are an editorial due-diligence framework, not a claim that every vehicle has these provisions. For each answer, record the document, clause, person responsible, and anything unresolved. Do not accept a generic description of what SPVs 'normally' do.

The SEC's private-fund guidance emphasizes reviewing fees, expenses, and conflicts in offering documents and agreements. Its private-placement bulletin separately warns about limited disclosure, restricted resale, and possible total loss. A vehicle does not neutralize those underlying risks.

1. What fees will I pay? Ask about setup, management, administration, and transaction charges. Identify the calculation base, timing, recipient, and whether charges reduce invested capital. A stated minimum cheque may differ from the amount ultimately deployed into the company. No fee rate should be assumed from the word SPV.

2. How does carried interest work? Request the distribution waterfall, including the definition of profit, return of capital, any hurdle, and any clawback or adjustment mechanism. Ask whether the calculation is affected by expenses or losses. A headline percentage alone cannot describe the economic arrangement.

3. Which rights do I receive? Separate your vehicle-level information, voting, and consent rights from rights held by the vehicle in the startup. Ask who exercises underlying shareholder rights and whether participation in later rounds is possible, discretionary, or absent.

4. Which expenses can be charged later? Look for legal, accounting, tax preparation, banking, and wind-down costs. Ask whether expenses are capped, how extraordinary costs are approved, and whether additional contributions can be required. Do not assume the initial payment covers the full life of the investment.

5. What conflicts exist? Ask about related-party providers, referral compensation, other vehicles investing in the same company, and the manager's own holdings. Request the process for allocating opportunities and expenses. Disclosure identifies a conflict; it does not automatically resolve it in your favor.

6. What reporting is promised? Establish frequency, content, delivery method, financial statements, and tax-document expectations. Ask what happens when the company supplies limited information. Distinguish a contractual commitment from a manager's present intention to send occasional updates.

7. How are valuations determined? Ask who prepares marks, what methodology is used, and whether independent review occurs. A reported value may not be realizable in a sale. Request an explanation of how stale financing prices or changed business conditions enter the valuation process.

8. What happens when ownership is diluted? Understand whether the underlying security has participation or other protections, who decides to exercise them, and how any funding is obtained. Later issuance can change economic exposure; a right that cannot be funded may have limited practical usefulness.

9. Can I transfer or exit? Ask about manager consent, company restrictions, buyer eligibility, legal requirements, and costs. A provision permitting a transfer under conditions is not a standing buyer. Determine whether you have any redemption right rather than assuming one exists.

10. Who owns what? Identify the legal issuer of your interest, the holder of the startup security, and any additional intermediary. Ask how ownership is recorded and how cash and securities are held. Match legal names across documents and payment instructions.

11. Which documents govern? Request the complete subscription package, governing agreement, offering materials where provided, and relevant underlying terms. Ask which document controls if descriptions conflict. Have qualified advisers assess provisions you cannot interpret; summaries should not replace signed agreements.

12. Who decides? Identify authority over follow-on investment, amendments, sale, distributions, extensions, and manager replacement. Ask what investors can approve or block. Find the decision procedure before a disagreement arises, not after you discover you cannot influence an outcome.

Hypothetical: a manager says an SPV has 'no ongoing fee.' The agreement nevertheless permits accounting and legal expenses, and the distribution waterfall deducts them before calculating proceeds. The statement may refer narrowly to a management fee; it does not establish that ownership is cost-free. Ask for a worked illustration under the actual terms, including a loss scenario, without treating the illustration as a forecast.

Finish the review with three labels: answered in writing, needs clarification, and unacceptable to me. Keep business evaluation separate: a well-documented vehicle can still own a weak company. Conversely, an appealing company does not excuse unclear authority or expenses. If material questions remain unresolved, pausing is a complete and reasonable outcome of the checklist.