Executing a Flip Transaction: Bringing a Foreign Startup Into the U.S. Investment Market

Venture capital investors have shown a strong preference for U.S. companies, where the legal and regulatory framework and exit strategies are better understood. A foreign startup seeking to become a U.S. entity might consider a flip transaction. In a flip, foreign shareholders exchange their foreign stock for stock in a new U.S. entity (typically a Delaware corporation). Before proceeding, counsel should consider tax, intellectual property, immigration, and operational issues, along with associated costs and documentation.

Tax implications of flip transactions depend on the existing entity's current jurisdiction and the makeup of its shareholders. Upfront due diligence should include examining company contracts to determine if any third-party consents or approvals are required. Counsel must also consider intellectual property ownership and how IP rights will be shared between the U.S. parent and its foreign subsidiary. The transfer of IP rights could also have tax consequences.

If officers, directors, or other key personnel will relocate to the U.S. in connection with the flip transaction, counsel must understand the complex immigration laws and procedures with which such personnel must comply and be able to facilitate such a move in conjunction with the corporate relocation.

In addition to formation and qualification to do business in the U.S., existing shareholder agreements should be terminated, and corresponding agreements entered into between the U.S. company and the startup entity's shareholders. Contract rights will likely remain with the foreign subsidiary, but if not, they will need to be assigned. Depending on where the IP resides, licensing agreements may be required between the parent and subsidiary.

Listen as our authoritative panel discusses the structuring and documentation of flip transactions.