How to do a Delaware Flip

Insiders guide to completing a Delaware flip


Flipping your company to Delaware means changing your corporate structure to create a holding company in Delaware that owns your existing company. This creates a 'group structure' with the Delaware parent company at the top.

This is typically done when a company wants to raise from US investors, be it angels or VCs. If you're new to the concept of the Delaware flip, you may want to check out this post first.

This is a considerable undertaking so planning is essential. We've noted some common pitfalls below so you can watch out for them. The cost of getting this wrong is a slowdown of your fundraise or distraction from hitting those important early milestones.

🚨Note: If you need a US operating company to expand into the US and it doesn’t need to be the parent company you should open a subsidiary, which is a company below your existing legal entity. This has different legal and tax risks from a Delaware flip.

Before you do it

Timing

You want to do this as late as possible. By this we mean, once you are already accepted into the accelerator or have agreed on the funding with the investor. Speak to them to find out whats the latest point you can do it.

There’s no need to rush into anything here, as it’s hard to reverse. Flipping your company can expose you to higher tax rates, higher legal and accounting fees, and lots more paperwork.

Once you have decided to take the leap, there is one more thing to consider. The financial reporting year in the US runs from January until December, so if you are towards the end of the year, and you think you can manage to delay the flip until the new financial year, you will be saving yourself from producing financial statements and a few thousand dollars in accounting fees, filing fees and franchise tax payments.

Lots of early stage companies, especially newly accepted Y Combinator companies rush to complete the flip, which is understandable. You need to get it done, so why delay the inevitable? Just waiting until January means you save money on paying fees and paying taxes, plus you get to hear back all the latest recommendations on the process, which lawyers to use, and how other founders managed the process.

Can I go it alone?

Short answer, no. Working with an expert saves you a lot of time, makes it less distracting for you, and ensures things are done correctly. It’s an important process to get right and it helps to plan ahead. It’s not going to be cheap, but this is not a time to be cost-sensitive.

You need a lawyer for the process itself and you will also then need a registered agent. Your registered agent is responsible for receiving and forwarding legal documents and correspondence from the Delaware Division of Corporations to clients in a timely fashion. According to Delaware law, they can be either an individual resident, a domestic corporation or a foreign corporation authorised to transact business in Delaware and it will also give you the address to use to register your company.

When it comes to a registered agent, you just need to have one, but which one isn’t such a critical question. Lawyers, on the other hand, do make a big difference. For a flip, ask around and make sure you go with a law firm that not only comes with glowing recommendations but also has flipped lots of companies like yours. Experience is essential here. We are always happy to share our thoughts on some great lawyers to talk to — or accountants for that matter, so feel free to email if you want our opinions.

Expansion vs Investment

Are you just using this for investment or for expansion into the US?

By expansion, we mean using the company for additional reasons, like employing US based staff and selling to US customers.

If you want to use the company just for expansion, a subsidiary might be easier and won’t incur the costs and admin of the flip.

Flipping your group structure at this stage should really only be done for investment. Speak to a lawyer or accountant if you think you need to do it for another reason, to double-check it’s necessary.

If you want to use the company for both investment (and your investors are insisting on a flip) and for expanding into the US, will require some other work to be done, like registering for business licenses and setting up appropriate inter-company transfer pricing agreements.

Process

Pick a law firm

Speak to any founder friends or partners at the venture capital firm so they can give you a few recommendations. Ideally, you want a list of 2–4 to talk to properly before you make your decision.

Key things to look for:

Going through the process

Usually, when you create a group of companies, you do so by opening a subsidiary company, which is a company owned 100% by your original company. It’s fairly simple in terms of process, you simply register the new company with your existing company as the owner and job done.

The difference here is that we need to create a company, then swap your ownership of your original company for ownership of the new company.

Instead of using an online service and doing a quick setup, you are going to need a lawyer’s help here. You will need to provide them with the details of your existing company and all its shareholders, including how many shares they hold.

Then the lawyer will create the new company and begin the process of ‘flipping it’, which is done by a share exchange. All your existing company shareholders will now need to exchange their shares for shares in the new company.

You will of course have to provide the information about your existing company and decide the name of the new company, but other than that, a good lawyer will help you navigate through the rest.

Key things to do here:

Conclusion

Sounds straightforward? Yes, it’s not exactly rocket science but it does make sense to put some time, planning, and money into making sure it's done right. Choosing a good lawyer and talking through the process fully can save you in the future. The US has a much more complex tax landscape especially in comparison to the UK and EU, so make sure to get some tax advice from your financial advisor. The legal system is also far more litigious and can cause chaos if your company is not set up properly, so also be sure to get legal advice.


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