Edition 16: Power of interim management; US Fundraising: to flip or not to flip; From 5 to 50 employees;
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READS
Collectively, these links connect you to 1,000+ articles and videos on pitching and startups. Listed in no particular order to encourage discovery :)
From five to 50: How to hire at your early-stage startup (by Sifted)
âYou need to be more creative in terms of the hiring scope that you have at the beginning in order to estimate if the person will succeed in the first yearsâ â Vanessa Stock, Pitch
âI wasnât necessarily looking for someone that was in London â I was looking for the best individual for that jobâ â Matt Monette, Deel
OPINION: US Fundraising: To Flip or Not to Flip
Wilson Sonsini
One of the most common US expansion and fundraising questions we field from UK/EU founders is whether or not to âflipâ into a US entity. Flipping entails incorporating a new US entity (typically a Delaware corporation) (âTopCoâ) to become the holding company of the non-US entity being asked to flip (âFlipCoâ).
From a process standpoint, the Delaware âflipâ is usually effected by a share-for-share exchange whereby the cap table of FlipCo is effectively migrated to TopCo on a 1-to-1 share basis. With all shares of FlipCo transferred to (or exchanged for shares in) TopCo, FlipCo becomes a wholly-owned subsidiary of TopCo and the shareholders of FlipCo become the shareholders of TopCo.
To flipâŚ
US investors are familiar and comfortable with the corporate mechanics and complex documentation involved in investing in a Delaware corporation and understand the business-friendly laws and well-established legal system of Delaware - all of which help to reduce friction for successfully completing the financing. US investors leading a Seed or Series A round â particularly US investors without offices in the UK or Europe - often will not want to deal with the friction created by having to invest in a company that is not a Delaware corporation. In fact, some US-based accelerator programs simply will not accept companies unless they agree to flip into a Delaware corporation. As a result, having a Delaware holding company often is a necessary condition for raising a US-led Seed or Series A round. At Series B and later, the requirement to flip into a Delaware holding company is relatively rare â particularly for businesses with UK parent companies.
Note, though, that a Delaware holding company alone typically does not attract US investment; a Delaware holding company may be a necessary condition, but it is not alone a sufficient condition. There often is some other US component to the deal when a UK or other European company raises a Seed or Series A round led by US-based investors, e.g., senior employees in the US, initial traction in the US, and/or experience at the management level scaling a US business and/or raising capital from US investors.
or not to flip?
Changing the corporate structure of an entity requires significant investment, in terms of both time and cost.
On the timing side â the process of flipping into a US company can add weeks or months to the financing process due to drafting and filing all the necessary paperwork and obtaining the requisite legal, tax and financial expertise to advise on the transaction as a whole. Obtaining consent from all current shareholders to effect the flip can also add to the timeline. Moreover, in certain jurisdictions like the UK, the company needs to submit an application for clearance to the relevant tax authority for approval that the flip is being effected for bona fide commercial reasons. Other regulatory approvals may be required as well, including approval of ownership by a US (i.e., foreign) person in certain jurisdictions.
On the cost side â a flip involves legal and administrative costs, which can accrue tens of thousands of dollars in fees depending on the maturity of the company (e.g., flipping a company at the pre-seed stage typically costs much less than flipping at Series A). The ultimate costs for a flip depend on factors such as the complexity of the cap table, ease of obtaining the requisite consents, whether the company has any creditors, and whether the company is trying to preserve favourable tax treatment (such as SEIS or EIS in the UK) for early investors. Also of paramount importance from a cost perspective, a flip may have significant tax implications in both the US and the home jurisdiction. Where the flip is recognized as a taxable event in the home jurisdiction (e.g., a German GmbH flipping to the US), it will potentially subject the company and its shareholders to tax payment obligations.
Ultimately, whether a Delaware flip is advisable for a UK or other European startup depends on the quality of the potential US deal being considered. Crucially, companies should think twice about incurring the cost of a Delaware flip without the certainty of a high-quality term sheet being offered; US investors that insist on a Delaware flip will rarely walk away from a deal they otherwise are keen on without first giving the company an opportunity to effect the flip.
For additional information on flipping to the US, as well as other key questions and considerations relating to US expansion, please see our comprehensive FAQ on US expansion, fundraising and exit available here.
Contact: Daniel Glazer
Wilson Sonsini - London
+44 (0) 770 136 6176 / +1 201-294-5784
www.linkedin.com/in/danielcglazer
ATTEND
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Whether you are an early-stage startup founder, a member of the C-suite leadership team, or involved in talent acquisition, this event is designed to provide you with valuable knowledge and alternative solutions to address your immediate business challenges.
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Operations leaders from the Operations Nation community and a few guest speakers will share thought-provoking insights, wisdom and war stories all related to the theme of the week: Scaling Operations in the Midst of a Recession.
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đ We are watching PR for Early-stage Startups by Pretiosum Ventures
Are you a start-up founder who wants to learn more about PR? Do you want to know how to craft your story, pitch to the media, and build your brand awareness?
You'll learn:
âWhat is PR and why does it matter for start-ups
âHow to define your target audience, key messages, and goals
How to create a PR strategy and plan that aligns with your business objectives
âHow to find and connect with journalists, bloggers, influencers, and other media outlets
âHow to measure and optimize your PR results and impact
đ And reading The Black Swan: Second Edition: The Impact of the Highly Improbable by Nassim Nicholas Taleb
A âBlack Swanâ is an unexpected outcome that changes our definition of what is plausible. Although this book is not the easiest to read, it will help you understand probabilities, the laws of the market, and venture capitalists. Well-worth the time investment.
Please note that any charts, data, or projections discussed are subject to change without notice, may differ from opinions expressed by others, and are for informational purposes only. They should not be relied upon when making any investment decision. The content speaks only as of the date indicated; Pretiosum Ventures has not independently verified third-party links or sources, nor makes representations about the enduring accuracy of such information.