Flipping out with a German GmbH to the US as a Startup?

Why are many lawyers dedicating whole teams to the topic?

German founders don’t think about the ?right“ legal structure or jurisdiction when they start their venture. 

But once the founders start thinking about raising venture capital, it’s essential to choose a governing platform which is suitable for scaling the business and onboarding investors. 

This is often when European founders are faced with the choice to possibly flip their company to the US. So what does that mean, why would they need to do it?

Whole legal Teams are providing services called ?flipping to the US“

A flip is 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. Including their IP and assets.

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

Most often such US entity is a Delaware C Corp. While Silicon Valley is where most startups are based physically, on paper they are incorporated in Delaware.

Why is Delaware C Corp so good?

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.

The corporate filing and government interaction process is much easier than many others jurisdictions plus there is 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 large and small companies.

"Sand Hill Road VC Investors only accept Delaware C Corps if they invest in Startups - sure there might be exceptions but my experience in meetings with the big and small VCs proofed that they are 99% focused on the Delaware Corp structure." Boris Hardi

Should you do it?

It is indeed difficult to say - famous investors in Germany are trying to put pressure on the German government to introduce more startup friendly laws like digital incorporation procedures, tax reliefs, subsidies and so on.

Raising money from American VCs is still difficult with a German GmbH and easier to do with a Delaware entity. Some VCs cannot even invest outside of the USaccording to their LPAs (Limited Partnership Agreements). 

The main argument though is to facilitate funding via US American VCs. The VC will demand to own all the companies IP and other Assets as securities. This requires a hard cut with the German entity and transfer of all assets.

This again is a taxable transaction - therefore it is important (as the tax lawyers will tell you) to do this before the startup makes money. The German Tax Authorities will ask for a tax based upon NRR, revenue and profits in the past, actual AND FORECASTED (!).

European startups who were flipping their company to a Delaware C-Corp start thinking about it while preparing an A Round or even incorporating. Yes, revenue in the US is needed to make that structure work but there is a much deeper meaning to it. How can the EU establish a investor-friendly tax, corporate structure that attracts investors and startups to incorporate within the EU?

Boris Hardi - Munich, August 2019