Non-US startups that want to accept funding from US investors can restructure and incorporate in Delaware by executing a "Delaware flip." To do so, you'll need to set up a corporation in Delaware to serve as the parent company, then make your original foreign startup its subsidiary. Angel investors, venture capitalists (VCs), and startup accelerators often provide initial capital in a US startup's early stages, and a Delaware flip can help foreign businesses access this funding. However, some US investors will require a Delaware flip before they invest since incorporation in Delaware can help facilitate more efficient portfolio management and stronger regulatory protections.
Below, we'll discuss what a Delaware flip is, when to consider using it, how the process works, and the timeline to expect.
Key takeaways
A Delaware flip helps non-US startups access US venture investments and prepare to enter the US market.
It requires filing a certificate of incorporation in Delaware, offering a share swap to current shareholders, and turning the non-US company into a subsidiary of the new Delaware C corporation (C corp).
Before deciding on a Delaware flip, you'll need to consider potential tax liability in your home country; reporting and taxation requirements in both jurisdictions; and how you'll treat the transfer of assets from your original company to the new one.
What is a Delaware flip?
A Delaware flip is a way for a non-US business to create a US-based parent company. It allows your foreign startup to accept funding from US investors, hire US employees, or participate in an accelerator.
To execute a Delaware flip, you'll need to restructure your company so that a newly formed C corp in the state of Delaware becomes the parent entity. The original foreign company can continue as a wholly owned subsidiary. This lets your company maintain its existing contracts, employees, and operations while also establishing your business in the US.
The state of Delaware is often the preferred US location for C corps due to its tax benefits, business-friendly regulatory environment, and extensive case law developed by the Delaware Court of Chancery, a court system known for its long history of resolving business issues.
Why do foreign startups consider a Delaware flip?
A Delaware flip could help your foreign startup simplify operations, expand funding opportunities, or set the stage for future growth in the US. In some cases, investors might require a Delaware flip. A lead investor in the US, for example, might not move forward with funding unless you incorporate in Delaware.
In other cases, your business's short- or long-term goals will dictate if a Delaware flip makes sense. If you have plans to enter the US market or a co-founder is located in the US, you might decide to execute a Delaware flip, with or without pressure from investors.
A Delaware flip can be a complex process, and your startup will likely incur legal fees to draft and review the required documents and conduct tax and equity planning. However, the restructuring may be worthwhile if your startup wants:
Easier access to US venture investors during the seed or Series A stage
The ability to participate in a US accelerator program, such as Techstars or Y Combinator (YC)
To serve US customers, base your leadership team in the US, or issue equity to US-based employees
Closer alignment with US investor expectations and market norms around corporate structure, governance expectations, taxes, and compliance
How does a Delaware flip work?
Here's how to execute a Delaware flip:
Create a new C corp in Delaware by choosing a name, selecting a registered agent, and filing a certificate of incorporation with the Delaware Division of Corporations.
Request that shareholders swap their shares in your current, non-US startup for shares in the new Delaware C corp. This step requires drafting a share-for-share exchange agreement, likely with the help of a lawyer. You'll also need to decide how assets, such as intellectual property, that belonged to your previous company will transfer to the new one.
When the Delaware corporation acquires 100% of the foreign startup's shares, the foreign company will become a wholly owned subsidiary of the Delaware parent company. Investors can then fund the US parent company and receive shares in the US entity in exchange, while the foreign subsidiary can continue to operate as before.
What should global founders consider before pursuing a Delaware flip?
Restructuring your company with a Delaware flip can have substantial benefits, but it also requires weighing tax and equity implications in both your home country and the US. To avoid unexpected tax liability for founders or shareholders, you'll need to coordinate legal and tax advice across both jurisdictions before executing a flip.
To start, check how a Delaware flip could lead to tax or stamp duty burdens in your home country. For example, you might need to pay stamp duty on the value of your shares if you first operated in Singapore, or apply for statutory clearance from HM Revenue and Customs (HMRC) if you founded a company in the UK. Depending on the country's tax laws, the foreign subsidiary might also be subject to tax implications resulting from the flip.
Once incorporated in the US, your new parent company might be subject to a higher corporate tax rate compared with your home country. You'll also need to comply with reporting requirements for the foreign subsidiary, which is considered a controlled foreign corporation (CFC) for US tax purposes.
Before the flip, review your cap table for accuracy, and consider how to transfer any existing convertible notes, simple agreements for future equity (SAFEs), or options.
How can you decide between a Delaware flip and forming a new entity?
For some founders, it's more straightforward to create a new Delaware business entity instead of flipping their existing ownership structure. Founders do not have to be US citizens or residents to incorporate in Delaware, and offices or operations in the US are not required – aside from designating a registered agent. This can make it simple to set up a Delaware business entity even if you're not planning to operate in the US in the near future.
When there are limited shareholders and little revenue to consider in the new structure, a Delaware flip's complexity and cost in legal fees might not be worth it. Consider forming a new entity instead of choosing a Delaware flip if your startup hasn't yet raised money, developed intellectual property, or built significant traction outside your home country.
What is the typical timeline for a Delaware flip?
The turnaround time to execute a Delaware flip and the timing for each step can vary. Generally, you can expect the whole process, from first adviser call to closing, to take two to six months. The timeline depends on the number of existing shareholders and jurisdictions involved. Coordinating across countries, especially when the transaction is subject to foreign tax scrutiny, can lengthen the process.
To incorporate in Delaware, you'll need to file a certificate of incorporation, create corporate bylaws, and get an Employer Identification Number (EIN) from the US Internal Revenue Service (IRS). Internally, you'll also need to prepare documents including updated cap table records and agreements governing the share exchange, intellectual property transfer, and any other structural changes you make during the flip.
How Stripe Atlas can help
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FAQs about the Delaware flip
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.