How do I invest with co-investors?

Doing Fund+ deals with co-investors

When leading a Fund+ deal with co-investors, your investment will have a slightly different structure. Rather than a single SPV (the “Target Company SPV”) that invests in the target portfolio company, a Fund deal with co-investors will create an additional entity (the “Co-Investor SPV”) to aggregate co-investors before investing in the Target Company SPV. This is to maintain one line item on the target company’s cap table and to preserve the fund’s venture fund exemption which allows the deal lead to charge carry, accept accredited investors, and have easier compliance requirements.

What’s different about Fund deals with co-investors?

Co-investors are not members of the Target Company SPV, and are instead members of a new entity that is created - the Co-investor SPV. The Target Company SPV is an aggregator, passthrough entity with 2 members, the Feeder Fund and the Co-investor SPV.

• Tax:

  • The main difference is that an EverFund (EF) deal with no co-investors is an SPV that has only one LP (the EF) is considered a single-member LLC and would be what’s called a “disregarded entity for tax purposes”. This means that no annual partnership tax return (”1065”) needs to be prepared and no K-1s distributed.

  • An EF deal with co-investors has a Co-investor SPV in which the co-investors participated and therefore requires an annual partnership tax return and K-1s for each co-investor in the Co-investor SPV. The Target Company SPV will file a partnership tax return for the Target Company SPV since it has more than one member, and issue a K-1 for the Co-Investor SPV.

  • If the Target Company is a “pass-through entity” (LP, LLC for example) then the Target Company SPV will receive a K-1 from the Target Company and include the items on the Target Company partnership tax return

• Compliance:

  • A Target Company SPV with only the EF investing is not required to file a Form D since it’s technically not a “pooled investment vehicle” under the SEC regulations.

  • If a Co-Investor SPV is created and contributes capital to the Target Company SPV, the Co-Investor SPV must file Form D with the SEC and file and pay Blue Sky fees, as applicable.

  • No Form D is required for the Target SPV because:

    • it is not actually issuing securities - it is acting as an “aggregator vehicle” formed for the convenience of, well, aggregating funds; AND

    • because no securities are issued, then this activity that does not need to rely on the Rule 506 safe harbor under Reg D, thereby no Form D is needed.

  • Each of the above positions exempt the Target SPV from needing to file a Form D.