Beyond the Flip: Longer-Term Implications of Operating a Multinational Group Structure
At some point, almost every international founder hears the same advice:
“You need to set up a Delaware corporation if you want to receive U.S. venture capital funding.”
For founders outside the U.S. who view the U.S. as a key market and hope to raise U.S. venture capital, that is often the correct guidance. But for startups simply chasing U.S. VC dollars without a clear market entry strategy, premature restructuring can result in a loss of precious time, focus and money—and if U.S. market entry does not work out, a very complicated retreat back home.
U.S. expansion is not simply about forming a new entity. It’s about building a structure that supports the company’s next stage of growth. Whether you’re opening a U.S. sales office, hiring your first U.S.-based employee, signing U.S. enterprise customers, or preparing to raise from U.S. investors, the decisions you make now can have long-term consequences for fundraising, taxes, intellectual property, equity compensation, securities compliance and cross-border operations.
Before rushing into a Delaware flip or forming a U.S. entity, consider the most common paths founders take—and the trade-offs each involves.
There Is No One-Size-Fits-All Structure
One of the biggest misconceptions founders have is that every international startup should immediately reorganize into a Delaware “C” corporation. In practice, the right structure depends on where your customers are (and where you expect them to be), where your management and engineering teams are located, whether your non-U.S. company has advantageous grants or R&D credits, and how quickly you expect to scale in the United States.
Generally, founders choose one of three paths:
Please refer to our article titled “Beyond the Flip: Structuring Your U.S. Expansion for Scale, Not Just Speed” for an overview of the other issues that founders need to consider when flipping to the U.S.
“You need to set up a Delaware corporation if you want to receive U.S. venture capital funding.”
For founders outside the U.S. who view the U.S. as a key market and hope to raise U.S. venture capital, that is often the correct guidance. But for startups simply chasing U.S. VC dollars without a clear market entry strategy, premature restructuring can result in a loss of precious time, focus and money—and if U.S. market entry does not work out, a very complicated retreat back home.
U.S. expansion is not simply about forming a new entity. It’s about building a structure that supports the company’s next stage of growth. Whether you’re opening a U.S. sales office, hiring your first U.S.-based employee, signing U.S. enterprise customers, or preparing to raise from U.S. investors, the decisions you make now can have long-term consequences for fundraising, taxes, intellectual property, equity compensation, securities compliance and cross-border operations.
Before rushing into a Delaware flip or forming a U.S. entity, consider the most common paths founders take—and the trade-offs each involves.
There Is No One-Size-Fits-All Structure
One of the biggest misconceptions founders have is that every international startup should immediately reorganize into a Delaware “C” corporation. In practice, the right structure depends on where your customers are (and where you expect them to be), where your management and engineering teams are located, whether your non-U.S. company has advantageous grants or R&D credits, and how quickly you expect to scale in the United States.
Generally, founders choose one of three paths:
Option 1: Keep Your Existing Company and Add a U.S. Subsidiary
This is often the default approach for companies testing the U.S. market, as it sidesteps immediate tax consequences that could result from moving the entire business to the U.S as well as the cost.
Your existing company remains the parent while a newly formed Delaware corporation subsidiary hires employees, contracts with customers and supports local operations. The longer the company waits to decide whether to effect a “flip” such that the U.S. company becomes the parent, however, the more the foreign parent’s valuation likely increases and the more complicated the process becomes.
Option 2: Complete a Delaware Flip
Many venture-backed companies eventually reorganize so that a Delaware corporation becomes the parent company and the original foreign company becomes a subsidiary. Depending on the home jurisdiction, this may be implemented through a share-for-share exchange, contribution, merger or similar mechanism. It can also be achieved through an asset transfer (e.g., key IP and customer contracts) from the foreign company to the U.S. company.
U.S. investors generally prefer a U.S. holding company structure because it provides familiarity around governance, equity plans, financing documents and future transactions. Additionally, many U.S. venture capital funds have limits in their fund documents that restrict or prohibit investment in non-U.S. companies.
A Delaware flip can make fundraising more efficient, but it should be driven by business objectives rather than pressure to “look ready” for investors. We often see a flip completed immediately prior to a round due to associated costs.
Option 3: Start with a Delaware Corporation
Some founders know from day one that the United States will be their primary market. In those situations, forming a Delaware corporation from the outset may be the simplest solution. The benefit is simplicity. The challenge is ensuring that the structure continues to work as the company expands internationally, hires across borders, creates or licenses IP, and raises capital from investors with different expectations.
This is often the default approach for companies testing the U.S. market, as it sidesteps immediate tax consequences that could result from moving the entire business to the U.S as well as the cost.
Your existing company remains the parent while a newly formed Delaware corporation subsidiary hires employees, contracts with customers and supports local operations. The longer the company waits to decide whether to effect a “flip” such that the U.S. company becomes the parent, however, the more the foreign parent’s valuation likely increases and the more complicated the process becomes.
Option 2: Complete a Delaware Flip
Many venture-backed companies eventually reorganize so that a Delaware corporation becomes the parent company and the original foreign company becomes a subsidiary. Depending on the home jurisdiction, this may be implemented through a share-for-share exchange, contribution, merger or similar mechanism. It can also be achieved through an asset transfer (e.g., key IP and customer contracts) from the foreign company to the U.S. company.
U.S. investors generally prefer a U.S. holding company structure because it provides familiarity around governance, equity plans, financing documents and future transactions. Additionally, many U.S. venture capital funds have limits in their fund documents that restrict or prohibit investment in non-U.S. companies.
A Delaware flip can make fundraising more efficient, but it should be driven by business objectives rather than pressure to “look ready” for investors. We often see a flip completed immediately prior to a round due to associated costs.
Option 3: Start with a Delaware Corporation
Some founders know from day one that the United States will be their primary market. In those situations, forming a Delaware corporation from the outset may be the simplest solution. The benefit is simplicity. The challenge is ensuring that the structure continues to work as the company expands internationally, hires across borders, creates or licenses IP, and raises capital from investors with different expectations.
Please refer to our article titled “Beyond the Flip: Structuring Your U.S. Expansion for Scale, Not Just Speed” for an overview of the other issues that founders need to consider when flipping to the U.S.