Carl Fritjofsson

@fritjofsson

Flipping out — a guide for international founders considering a “US flip”.

Legal governance… 🤢 Most entrepreneurs probably choke up a bit whenever they hear that word. It’s far from as exciting as solving technical challenges, building product, managing a team or acquiring users. But it’s one of those must-dos for early stage founders and it creates the foundation to control and manage your innovation.

Most founders don’t think much about it when starting the company and look to the closest governing system in their home market. This is generally the right thing to do.

But once you start thinking about raising venture capital, creating options program, opening up subsidiaries in new markets, etc. it’s essential you choose a governing platform which is suitable for such “scale”. This is often when European founders are faced with the choice to possibly flip the company to the US. So what does that even mean, why would you need to do it and should you go through with it?

Did you say “flip”? 🙃

A flip is the process of creating a US holding company for an international company. The end result is that the international company will be owned entirely by the new US entity.

In a flip you start by creating a new US entity and insert it “above” the international company. This is done by making shareholders of the international company do a share-for-share exchange to the US entity.

And most often such US entity is a Delaware C Corp. While Silicon Valley is where California’s startups pay rent, on paper they tend to live in Delaware.

Why should you care? 🤔

Since Delaware offers the most comprehensive set of corporate law in the United States and probably the world, it’s the most comfortable and safe governing body for corporations to do business from. Not only is the corporate filing and government interaction process relatively easier than many others jurisdictions, but you also have an endless repository of business situations on topics like regulatory compliance, corporate risks, or how to invest, divest and merge companies. This makes the governing body more predictable for its counterparts, which has resulted in Delaware corporate law as home turf for the corporate ecosystem of VCs, investment bankers, tax specialists, lawyers, corporate development experts, and most of your favorite companies large and small.

Should you do it? 🤠

As always in the world of entrepreneurship, the answer is not black or white. When considering raising money from American VCs, you should expect that they most often prefer to invest in a Delaware entity. Some VCs cannot even invest outside of US, or even Delaware, law according to their LPA (Limited Partnership Agreement — basically the paper which specifies how the VC should invest the money its LPs have invested into it). Hence the primary argument to flip is that you will eliminate some of the friction of doing business with American VCs.

And not too long ago you saw European entrepreneurs flipping their company to a Delaware C-Corp as soon as they started thinking about an A Round or even incorporating, but the times have changed. Here’s why. First, on a practical level, more and more US VCs have the license (by their investors) to hunt for companies that are based outside the US, which means there’s less pressure in a big A round to flip your company right away just to get some cash in the bank. Second, there’s less of a rush. The cost and complexity of doing the flip increases over time, but it’s still possibly to do it at a later stage.

And you can in fact lose something flipping out to Delaware right away. Staying where you are gives you access to a tax code you hopefully know, access to government incentives to startups (should your country provide any).

Finally, worth mentioning is that US corporations also have a ton of cash “locked” outside of the US that for tax reasons makes European startups an even sweeter deal for acquisition. As Daniel Glazer of WSGR, who works with European startups expanding to the US, points out an example close to home for us in the Nordics with King.com:

Despite a strong US presence, King filed for its 2014 IPO on the New York Stock Exchange through its non-US parent company incorporated in Ireland. In 2015, Activision bought King for $5.9 billion — $3.6 billion of which was “trapped cash” held outside the US. Activision reportedly saved about $1 billion in taxes by acquiring King rather than repatriating the money to the US. — Daniel Glazer, Partner @ WSGR

There are several Creandum portfolio companies who have flipped to the US. Some sooner than others. With Wrapp we never flipped the company, despite moving our headquarters to San Francisco and having operations in 18 countries. When raising tens of millions of $ from American VCs we were never even challenged and questioned about flipping the company.

Consequently, flipping your company to the US is not a must in today’s day and age. You should never proactively flip the company, unless you have a very explicit reason for it. Flipping automatically to Delaware is almost a cargo cult mentality, when in reality it should be a matter of careful consideration. In the wise words of a true lyricist:

Is it worth it? Let me work it. I put my thing down, flip it and reverse it. — Missy Elliott, Work It 💪 👊
The ultimate flip…the kickflip!

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