Client Alert

Flip Transactions: Taking your Startup from Europe to the U.S.

22 Jun 2016

Considering moving your startup from Europe to the United States? A “flip” into a U.S. corporate legal structure may be best for the long-term growth of your business. Foreign technology startups seek to reorganize in the United States for several reasons, principally access to venture capital. Although not impossible, raising money from U.S. investors as a foreign business is problematic because U.S. venture capitalists generally only invest in U.S. companies, where they are familiar with the legal and regulatory regimes and market norms. Venture capital is not the only financial reason to reorganize in the United States, as exit opportunities, whether through acquisition or the public market, may be more bountiful (and certainly better understood by U.S. investors).

A share exchange is the most common method for implementing a flip transaction, and the preferred U.S. company structure is a Delaware corporation. A share exchange requires existing shareholders to tender their shares to the newly formed Delaware company in exchange for a like number of shares in the Delaware company. This results in the foreign entity becoming a wholly-owned subsidiary of the Delaware company. Why Delaware? Much has been written on this topic, but in short entrepreneurs and investors favor Delaware due to its well-developed corporate law and the predictability it affords stakeholders. 

Once the flip transaction is complete you can begin conducting operations in the United States through the Delaware company while operating in Europe through the foreign subsidiary. Existing shareholder agreements will need to be terminated, and corresponding agreements need to be entered into between the U.S. company and your shareholders. Legal terms in the old shareholder agreements should mirror the legal terms in the new shareholder agreements to the extent reasonably practical. Before you decide whether to flip into the United States, you will want to consider, among other things, whether there any tax, intellectual property and business issues that may deter you from reorganizing in the United States. These issues can be complex, so you will want to line up experienced legal and tax advisors, both in the United States and your local jurisdiction, before proceeding with a flip transaction.  

Tax considerations are of the utmost importance when deciding to flip. The first question to ask is whether the flip transaction can be done on a tax-free basis. The answer will depend in part on the laws of your local jurisdiction and the composition of your shareholder base.

Second, you will also need to develop a game plan for your startup’s intellectual property. Key points to consider include determining which company will own intellectual property and how intellectual property (and other assets) will be shared between the U.S. company and foreign subsidiary. Potential U.S. investors may insist on intellectual property residing in the U.S. company, but likely could get comfortable with a license arrangement between the two entities. The transfer of intellectual property or associated rights could also trigger adverse tax consequences if proper planning is neglected prior to the flip transaction.

Finally, you should consider whether any of your existing commercial agreements will require third-party consents or approvals. For example, your real estate lease may contain a provision that allows your landlord to terminate your lease in the event of a reorganization transaction. All commercial agreements should be carefully reviewed by you and your advisors in order to avoid inadvertently triggering a third-party termination right. 

Tax issues will only become more complex as your business grows, making it advisable to move forward with the flip early in your company’s life cycle. The same can be said for intellectual property and existing commercial agreements. Ultimately, if you want access to capital in the United States, you may find yourself evaluating the merits of a flip transaction. With the right advisors in place, you can accomplish this quickly and efficiently to take advantage of financial opportunities in the United States.



Unsolicited e-mails and information sent to Morrison & Foerster will not be considered confidential, may be disclosed to others pursuant to our Privacy Policy, may not receive a response, and do not create an attorney-client relationship with Morrison & Foerster. If you are not already a client of Morrison & Foerster, do not include any confidential information in this message. Also, please note that our attorneys do not seek to practice law in any jurisdiction in which they are not properly authorized to do so.