SPVs and waterfalls: how small deals split the money
An SPV is a company formed for one deal. The waterfall is the order the money comes back out. Most disputes start in the gap between what people assumed and what the agreement says.
What an SPV does
Several investors put money into one LLC, and the LLC makes one investment: a property, a startup, a boat, a business. A sponsor organizes it and usually manages it.
The waterfall
A typical order:
Investors get their capital back.
Investors get a preferred return, an agreed percentage on their capital.
The sponsor catches up, receiving a larger share until it reaches its agreed split.
Remaining profit splits between investors and sponsor, often 80/20 or 70/30.
Every step has choices: whether the preferred return compounds, whether returns are measured deal by deal or overall, and whether the sponsor's share is subject to clawback.
Sweat equity in an SPV
A sponsor who contributes work instead of cash usually takes a profits interest: a share of future gains, not existing capital. Structured properly, it can be tax-efficient. Vesting, what happens if the sponsor leaves, and how the interest is taxed all need answers. See one partner does all the work.
Securities law
Selling SPV interests to investors is generally a securities offering. Most SPVs rely on an exemption, which comes with conditions: who can invest, how you can advertise, and federal and state notice filings.
What to do
Write the waterfall with numbers, not adjectives, and run an example through it before anyone signs. Then make sure the operating agreement, the offering documents, and the tax allocations all say the same thing. A multi-member plan covers the agreement.
This is general information, not legal advice for your situation. If you want an answer for your business, book a consultation.
