In the exuberant venture markets of the past, thousands of SPVs were minted to capture “once-in-a-generation” opportunities. But what happens when the generation passes, but the entity remains? Welcome to the era of the Zombie SPV and the pain it causes the GPs, in this case, SyndiCat.
A Zombie SPV is a vehicle that holds shares in a portfolio company that is neither dead nor alive. The startup isn’t growing, it isn’t raising new capital, and it definitely isn’t exiting. It is simply… existing.
1. The Information Blackout
Zombies are notoriously quiet. As founders pivot or hunker down for survival, investor relations are often the first thing to be cut.
- Ghosting the GP: The GP stops receiving monthly or even annual updates.
- The “Mark-to-Market” Guessing Game: Without updated financials or a new round of financing, the GP has no choice but to keep the investment marked at “Cost,” even if the true value is pennies on the dollar.
2. The Exit Strategy: Putting the Zombie to Rest
How do you kill a Zombie? It’s harder than it looks.
- Dissolution: You can’t easily dissolve the SPV while it still holds an asset (the shares).
- Secondary Fire Sales: Some GPs try to bundle their “Zombie” positions and sell them to specialized secondary players for a nominal fee just to clear the cap table.
- Distributing “In-Kind”: The GP can choose to distribute the physical shares to the LPs’ personal names. However, most LPs don’t want the hassle of holding private stock directly, and many company bylaws restrict such transfers. This is administratively expensive too!
3. The Administrative Purgatory
For a GP, a Zombie SPV is a slow-motion operational crisis. Even if the company is stagnant, the SPV’s legal and tax obligations do not pause.
- Ongoing Costs: Tax filings (K-1s), Delaware franchise taxes, and fund administration platform fees continue to accrue every year.
- The “Dry” Well: Most SPVs raise a small amount of “operating reserve” at the start. In a Zombie scenario, that reserve eventually hits zero.
- GP Out-of-Pocket: When the reserve runs dry, the GP is often faced with a grim choice: pay the state and the accountants out of their own pocket or let the entity fall into “void” status, risking the underlying assets.
Thankfully, the Propel(x) fee structure helps significantly mitigate Zombies becoming administrative nightmares. Our starting fee of $4000 covers the SPV administration for 10-years, which is generally sufficient for the GP to decide on an SPV’s Zombie status. Our fee covers the SPV dissolution costs and therefore precludes the need for an operating reserve.
The Bottom Line
An SPV is joined to its portfolio company at the hip. Preparing for the worst case scenario is as much a part of the GP’s role, as it is of the entrepreneur. Being proactive and in-the-know on the portfolio company’s fortunes is important. Administratively, Propel(x) SPV-as-a-Service offers significant mitigation.
