An inbound “flip” transaction (“flip”)morphs a foreign entity (usually a startup) into a US entity, typically to receive US angel or venture capital funding.  Consider the most common scenario:

Forco, a foreign startup, has filled a market need and has accelerating year-over-year growth. Without proper funding, Forco remains highly vulnerable to emerging, funded competitors.  Forco has identified Investor, a US-based angel investor or venture capital firm interested in investing.  However, Investor has expressed discomfort with Forco’s foreign entity structure and foreign governing law.  As a condition to funding, Investor requires Forco to reincorporate in the US.

A willingness to flip opens the world’s top venture capital market to foreign startups.  The Global Venture Capital and Private Equity Country Attractiveness Index ranks the US as #1 in venture capital overall[1] and in five distinct categories:  size of the economy ($15.1 trillion GDP in 2011),[2] size of the stock market ($15.6 trillion stock market cap in 2011),[3] stock market liquidity ($4.7 billion daily trading volume on October 11, 2012),[4] IPO market activity (71 IPOs in the first half of 2012),[5] and mergers and acquisitions (“M&A”) market activity (3,159 M&A deals in the first half of 2012).[6]  Of the $48.7 billion in global venture capital in 2011, the US venture capital market comprised 67%.

Foreign startups should generally not flip before securing US investors:  first, the flip eventually subjects the worldwide operation to US tax because the new US parent is taxed on its worldwide income.  Second, as with Forco and US investors in the scenario above, a US parent would prevent some foreign VCs from investing in the operation.

Once US investment is secured, legal counsel flips the foreign startup.  In a flip, Forco’s shareholders create a new US entity (“Domco”), and exchange their Forco stock for Domco stock.  After the exchange, the shareholders will own Domco, and Domco will own Forco.  Investor invests into Domco.

[Insert Fig. 1 – Flip Transaction, with caption “Fig. 1:  Flip Transaction”]

[Insert Fig. 2 – Post Flip, with caption “Fig. 2:  Post-Flip Transaction”]

In conjunction with a flip, foreign startups should consider a physical relocation to Silicon Valley.  The Silicon Valley venture capital market is the most vibrant in the world, comprising 41% of the US’s venture capital.[7]  Silicon Valley offers exposure to flagship startups and a uniquely experienced and innovative workforce, as well as to Silicon Valley acquirors and customers.

Royse Law Firm, a tax, business and corporate law firm headquartered in Palo Alto, California, regularly connects startups with compatible investors in the stages prior to the flip.  Royse Law Firm has been performing flip transactions since 2006, and the transaction is typically executed tax-free within about 3–4 weeks.  See our Recent Transactions for prior representations.

[1] Alexander Groh, Heinrich Liechtenstein and Karsten Lieser, The Global Venture Capital and Private Equity Country Attractiveness Index 2012, (last visited Oct. 11, 2012).

[2] International Monetary Fund, World Economic Outlook Database, (last visited Oct. 11, 2012).

[3] The World Bank, Market Capitalization of Listed Companies, (last visited Oct. 11, 2012).

[4] WSJ, Market Data Center, (last visited Oct. 11, 2012).

[5] PriceWaterhouseCoopers, After Strong Start to 2012, IPO Market Sees Pullback, PwC Says, (last visited Oct. 11, 2012).

[6] MarketWatch, Ernst & Young:  U.S. M&A Activity Falling, (last visited Oct. 11, 2012).

[7] Ernst & Young, Globalizing Venture Capital:  Global Venture and Insights and Trends Report, (last visited Oct. 11, 2012).


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