For most Nigerian startups with little or no financing locally, having a holding company whose parent company is set up in business and investor friendly countries such as US, Mauritius, Singapore, etc. is considered to be a strategic move.
This is largely due to the fact most investors are more comfortable investing in holding companies located in jurisdictions they are familiar with. This therefore explains the reason why most highly sought after US private investors and accelerators, make it a mandatory requirement for foreign startups to do a Delaware flip.
WHAT IS A DELAWARE FLIP?
This is simply a process that entails incorporating a company in Delaware such that the Delaware Company becomes the parent company while the foreign company becomes a subsidiary, and restructure its shares in such a way that the Delaware (holding company) becomes an owner of shares of the foreign (subsidiary) company.
In this case of a Nigerian startup, below is a description of what a Delaware flip would look like;
X Ltd is a private Fintech company registered and primarily doing business in Nigeria. Operating in a sector that is highly capital intensive, it has been unable to raise funds from investors within Nigeria. Having heard about funding opportunities in the US, the company has pitched its idea to a Venture Capital Firm (VC) in the US. Thrilled by the prospects of the business, the VC is willing to invest in X Ltd. They are however, uncomfortable with the idea of becoming shareholders in a company located in Nigeria as they are not familiar with the existing laws governing such transactions in Nigeria. In other to invest in X Ltd, they have requested that the later be incorporated in Delaware.
As a company already existing and operating in Nigeria, its primary company is in Nigeria. In other to establish the company’s primary presence in Delaware for the purpose of securing funds from the said investors, X Ltd would undergo a Delaware flip. To accomplish this, X Ltd would restructure its company in such a way that the company formed in Delaware would become the Holding/Parent company, while its company already incorporated in Nigeria, becomes a subsidiary to the Delaware company.
This form of restructuring would undoubtedly have several implications on its shareholders located in both Nigeria and Delaware.
Unlike what is obtainable with incorporating a new company in the US, which is easier and faster to implement, accomplishing a Delaware flip would not just require the services of experienced US and local lawyers who would set up the new company, but also modify the shareholding structure between the Non-US company and the new company in Delaware.
WHY DELAWARE FLIP?
For Nigerian startups and investors, a Delaware flip could be considered a viable option for various reasons;
1. Fundraising; This is the most important reason why startups in Nigeria would consider this option. Setting up a company in jurisdictions with sufficient resources as well as sustained venture capital best practices, such as the US is considered an attractive option. Most Nigerian startups such as Paystack, Flutterwave, PiggyVest, e.t.c have benefited from this.
2. Business friendly regulations; Depending on a company’s goals, it is ideal to establish a holding company in jurisdictions with regulations that are more friendly to certain kinds of business activities or corporate transactions such; crypto currency transactions, low tax considerations, etc.
3. Easy regulatory processes; With the world’s largest stock market situated in the US, the US laws provides a sustainable and easy way of handling any form of corporate undertaking such as exiting a company through IPOs or liquidation.
WHEN TO CONSIDER A DELAWARE FLIP?
Although the idea of undertaking a Delaware flip seems appealing, it might not be a recommended option for all Nigerian startups for several reasons;
i. the process takes time
ii. It is capital intensive
iii. The process might involve higher tax considerations as Non-US founders and investors of the company would be exposed to tax liabilities of a foreign country.
However, if the startup has a goal to raise money in the US, and it is already operating outside the US, it may have to consider this option.
SOME KEY CONSIDERATIONS BEFORE EMBARKING ON A DELAWARE FLIP
As stated earlier, accomplishing a Delaware flip isn’t the same as incorporating a new company as there are several processes and professionals such as lawyers (both in the home country where the Non US company is formed and US based lawyers), tax advisors, accountants involved in the process. Some important considerations founders must consider before embarking on a flip are;
1. Apart from the founders and members, are there third parties or investors who are key stakeholders of the company in Nigeria and if there are, do they consent to the flip?
2. Has the members of the board given their consent to incorporating a foreign entity?
3. Has a professional valuation been conducted on the foreign / Non-US business?
4. International tax liabilities
5. Possible license or sale of Intellectual Property to the newly formed Delaware entity where applicable
WHAT HAPPENS AFTER THE DELAWARE FLIP?
In some cases, investors may ask key officers to carry out daily activities from the US, in other cases, it may not. However, the Non – US company may continue to operate as a subsidiary to its newly formed holding company in Delaware.
Unlike setting up a new company in the US, accomplishing a Delaware flip is a huge undertaking and requires a significant amount of time and investment to achieve. It is therefore recommended that founders and members of a company, take adequate steps in considering whether or not a Delaware flip is ideal for the company particularly in its early financing stage. However, a flip could serve as a gateway to more financing opportunities as well as increase share value of a company over time.