Forming a Special Purpose Vehicle Should NOT Cause Brain Damage
I got lots of brain damage using the Assure platform
My career is kind of winding down. At least, one phase of it. My partner and I raised a VC fund and the investment period is over. One of the key components of our organizing documents was the ability for our limited partners to capture our follow-on investment rights at Series B and later.
We had a small fund, and it made economic sense to me that if you are an investor in a small fund, you ought to feel free to take risks at later stages with your own money when the fund was unable to. I am not of the opinion pro-rata is worthless. As an old floor trader, you press your winners. Cut your losers. Ruthless objectivity and great work on the front end will make you a lot of money on the back end.
A lot of funds charge management fees and carry on their follow-on investments, even if it isn’t their money. My partner and I decided that we’d charge 0. Only the fees to set up and administer the LLC. We weren’t taking the risk, and the work was minimal, so why charge?
Over the course of our fund’s investment period, we wound up investing in a London-based company, Vauban. I mention this because the special purpose vehicle (SPV) setup process in places like the UK, EU, Latin America, and Asia is horrific. There are lots of regulatory and legal hoops to jump through. AML/KYC is a next-level headache there. The legal fees can be crippling. In the US, it can be bad but I have never had that problem.
I also want to be very transparent because of what I am going to say next.
It’s not as if I don’t have SPV experience. When I started Hyde Park Angels, every single investment was an SPV. I wanted to set it up that way. I also wanted to charge investors an extra percentage to cover legal and ongoing accounting costs, rather than bury them in the closing with the entrepreneur. It was truly different at the time.
At that time, brokers were running deals and charging 6-12% on each side of the transaction to investors and entrepreneurs, putting no money in, and getting paid, carry, and maybe an equity kicker. Instead of deal runners, you might have called them mercenaries.
I had run a few investments outside of HPA in companies where we set up SPVs. It was pretty seamless. Cut and paste legal docs, get a blessing. Use the same accountant for every SPV and the cost for them to simply do K-1s every year was pretty cheap. Charge 5% more than each personal investment so that you had a chunk of money in an account to pay the accountant every year. Get a bank account. In the US, I never had a problem.
Until now.
We decided to use a competitor to Vauban, Assure. (I am deliberately not linking to their website. You will see why.) Vauban isn’t in the United States yet otherwise we would have. Vauban will be in the United States in early 2022, so watch for them if you are in the business of setting up a lot of SPVs. They will make your life a lot easier and more seamless.
Neither my partner nor I wanted to manage the process or the SPV for the next several years either. My partner has a lot of balls in the air. So do I. Plus, given my experiences over the past year, there is always a slight chance that someone will die. It’s good to have a “hit by a bus” contingency. When you use Vauban, no worries since once the entity is set up, it’s all automatic.
The entire process with Assure was so unbelievably broken I wish I’d never done it.
Few of our LPs could get through the process. One said it was so full of bugs the bugs had bugs. If you know one of them, ask them. They won’t have kind words.
In the process of doing all this, we had one big investor totally drop out. Why? Even though we told them we were charging nothing, and put that into the information when we set up our profile, the legal documents populated with different language that would lead someone to believe they were getting charged. That put a lot of egg on our face since most of this business is based on trust.
We also lost face with the entrepreneur and the other investors. We had to drop our initial commitment. Thankfully this happened long before the close. But, my partner and I had to personally eat the fee that was going unpaid. If we were making something on the deal, it would be easier to stomach.
We got the documents signed, the money wired, and hit our closing but I cannot tell you how much time I have devoted in my life to endless emails, phone calls and simply babysitting trying to get it done. Plus, we paid a fee to Assure to do it. Only one of their employees was truly helpful and highly capable. Tons and tons of brain damage. A total waste of over a week or so.
Help from Assure? No. Instead, our choice was to pay extra to take out the language on the legal docs. Fortunately, our other investors didn’t have a problem with the language.
Just to get the process going, I had to wire $2500 to them out of my own pocket to get the process started. I was assured by Assure employees that the money would be wired back to me but they didn't as of today. On my end, I had collected no money and only had verbal commitments. My LPs weren’t going to wire without docs, and I couldn’t get docs until I gave Assure money. If I would have done it myself, I would have had docs in hand.
My LPs couldn’t even see docs until they created a profile, and that caused a lot of brain damage and mistrust. They aren’t jamokes off the boat. They are professional investors and many have legal teams that go through stuff for them. I just hope they aren’t peppered with sales emails now.
Want to name your own SPV that you raised? No can do unless you pay a higher fee. At the end of the day, it looks very unprofessional. You wind up looking like a schmuck. Forever ensconced on the cap table is some no-name SPV.
It was unclear who signed the closing docs until we asked. Turns out, we sign them. But, we aren’t the legal managers of the SPV. So, that’s sort of weird. We don’t have control over the bank account. We tell them when to wire, how much to wire, and hope. This would probably be okay, except because of the miserable experience leading up to the close, there was huge trepidation.
On the day we wired, it was unclear if the wire would even go out on time to make the close. Lots of nail-biting and bile were released into the stomach.
The platform was impossible for people to log in to. The platform sent out the wrong link. It wasn’t intuitive at all. You basically had to wait for some human to do a Zoom call with you to guide you through. Assure was going through a tech upgrade. So, internally it had competing platforms. I get tech upgrades, but there has to be a sane way to set up internal operations so that investors don’t have the problems we had. Other online platforms I have used like Carta have had all kinds of upgrades over the years but I never noticed.
If you were investing out of a trust, or a Roth, or a self-directed IRA, or some other tax-advantaged investing vehicle, there was no way in their sign-up docs to indicate it. That just shows their programmers don’t have deep experience with this stuff and aren’t thinking about it. Interestingly, Vauban has that feature.
No one at Assure shows up at the office until 9 am Mountain time. As anyone in finance knows, the financial world doesn’t run on time zones anymore. It’s 24/7, seven days a week. They are unable to figure out their staffing so customers can be serviced when the customer wants to be serviced.
Once I logged in, I had virtually no real-time or updated visibility to anything. I didn’t know who wired. I didn’t know if the wire hit or not. I didn’t know who signed docs or who hadn’t. It was a total disaster.
Even when I made an Excel checklist, and manually went over it with the Assure employee they got it wrong.
Given all the wire fraud that is taking place these days, many of my LPs were concerned about the lack of security over the wiring process. I am aware of this because we did diligence on a company whose sole purpose is to stop wire fraud in real estate transactions. We didn’t invest but the diligence we did was enlightening.
Money going to Nigeria or Russia isn’t a joke. It really happens.
Ironically, the wiring process was painful as well. It was supposed to be automatic. We opted for manual because their systems didn’t work. That was fine with me given the fraud issues, but even when I asked them for confirmation of the wire I never received it. I pinged the entrepreneur to see if it hit. It had, thankfully. It wasn’t automatic, entirely manual. They got back to me late in the day.
If I had done this the traditional way, I would have had no problems. When you do an SPV like that, you are always herding cats to a certain extent. You are ready for that. But, instead, I relied on the promises of a company and its software. Not only did the software fail, but the company failed too. They made me look bad in front of my LPs.
We have some more companies in our portfolio that will raise follow on rounds that we will make available to our LPs again. We definitely won’t be using Assure.
Assure is pure dog shit. I had the same experience, or worse.
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