Foreign Companies "Coming to America": Structuring Options for Consideration

Here at SSM PC, one of the most frequent questions that we receive from our foreign entrepreneurs with established business entities in their home countries is how to set up a US-based entity so that they can do business or raise money in the States.  Here are three of the most common options they consider:

1. Subsidiary.    The foreign startup may create a subsidiary of the foreign parent company, provided that the foreign entrepreneur is not looking to raise investment monies from American institutional investors, who often require a Delaware Flip (No. 2, below) prior to investment.  Creation of a subsidiary is the simplest option.  It allows the foreign-based startup company to enter into contracts with American companies, and establish a national presence for expansion in the States.  Most foreign startup founders will incorporate their American company as a Delaware C corporation. All shares of the Delaware C corporation are owned outright by the foreign parent company.  The officers and directors of the Delaware C corporation often mirror that of the foreign parent company.
2. "Delaware Flip".    When a foreign startup from Europe comes to the States to raise a more substantial round of funding from American investors, American venture capitalists might advise the startup to do what is colloquially called a “Delaware flip” before any funding is provided.  This is because of American investors’ general preference to invest in American companies, and more specifically, in Delaware C corporations. In a Delaware flip, all of the shareholders who hold equity/shares in the foreign company exchange their equity/shares with the newly-formed Delaware C corporation, in order to receive proportionate equity/shares in the newly-formed Delaware C corporation.  When this happens, the foreign company essentially becomes a wholly-owned subsidiary of the Delaware C corporation, as it now has a single owner, the Delaware C corporation. The shareholders now, as a result of the Delaware flip, own equity/shares in the Delaware C corporation. We previously wrote about this procedure here.​
3. Create a Second Company.    Sometimes, the tax consequences and cost of accounting and legal services to perform a Delaware flip are too much to bear in light of the amount raised in the States.  In that case, a foreign entrepreneur may incorporate a second company (a Delaware C corporation) and enter into: (1) an intercompany services agreement and (2) technology licensing/sale agreement between the Delaware C corporation and the foreign company.  The former allows the Delaware C Corporation to pay for the operational expenses of the foreign company in exchange for its use of the technology/engineering services/technical support/administrative support/operational services of the foreign company.  The latter allows the Delaware C corporation to either license or purchase the technology from the abroad corporation, depending on the preference of their American investors and the tax consequences associated with either the licensing or sale of the technology.

Smith Shapourian & Mignano, PC is available to answer any questions or concerns you may have regarding the three options mentioned above.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.