How to do a Delaware Flip
4 Jun 2021
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
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.
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:
They have done this process a lot for your kind of company. You want someone who understands the nuance of your individual circumstance, including your industry, markets, previous fundraises, and where your existing startup is based.
They can offer startup friendly pricing. This might also include a delayed payment schedule such as after you receive funding.
Ask for timeframes for completion. The whole process can take a few weeks up to a few months. It helps to know the expected time frame so that you can keep on top of it and also to help with your planning as you won’t be able to receive your funding until this process is complete. You will also want to check in with them halfway to make sure it’s all on track, so it’s good to know when you should do this.
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:
Keep your existing shareholders informed. They will need to sign documents at the end of the process, so let them know asap as it will reduce delays. Pitch the benefits to them also. They may not be aware of the benefits (bringing in funding and accelerating growth), so sharing with them the reasons you are doing this will help get them on board.
Sharing all your company documentation with the lawyers. Ask the law firm what you need to give them and spend a little time getting this ready beforehand and storing it in one place.
Check-in with the lawyers halfway through the expected time frame. This is just to ensure things are on track and they have everything they need.
Ask when signatures are needed. You will need to sign a ton of documents, so set aside a half-day when the time comes to do it. By blocking out time, you ensure things get done properly and reduce delays
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.