Growth
Weighing up a Delaware Flip: which startups benefit most?
- Growth
- Article
- 7 minutes read
The Delaware Flip used to be almost a rite of passage for startups seeking out investment from US VC funds. But as markets like the UK have matured in recent years, is the Delaware Flip still a ‘default’ for early-stage founders? Together with specialist transatlantic investor Frontline, we get the inside track on the factors founders take into account when deciding whether or not to ‘make the flip’.
- If you decide to reincorporate in Delaware, do it early if possible. The process can be fairly painless for very early-stage (pre-seed and seed) startups. But at Series A and beyond, only a minority of companies elect to flip, and the process is now almost unheard of at Series B and beyond.
- Your ongoing legal and administrative costs will increase no matter when you decide to flip, as you will be managing multiple entities. If a Delaware Flip genuinely unlocks new funding from a US investor, the new complexity could be worth it, but this won’t be the case for every company.
Over the years, lots of UK founders have got used to learning more about Delaware than they might have expected. That’s because for decades now, reincorporating in Delaware has been a staple of the tech startup journey, especially for those companies looking to target the US market or raise from US investors.
What is a Delaware Flip?
A Delaware Flip is a reincorporation of your business in the United States – specifically, in the state of Delaware, where the ‘C-Corporation’ structure offers a very well-understood and business-friendly structure for founders entering the US market.
Executing a Delaware Flip doesn’t mean you abandon your home market. However, your European ‘topco’ will become a subsidiary of the US parent company. A reincorporation is not a decision to be taken likely, as it will lead to increased legal and administrative costs compared to running a single UK-headquartered company.
Pros and cons
Broadly, US investors have become more familiar with UK startup best practices and market conditions, and a UK topco is not usually a barrier for investors. However, being headquartered in Delaware can occasionally unlock new venture investment from some US venture capital funds, who may prefer to deal with portfolio companies operating corporate structures they understand.
As William McQuillan, Partner at Frontline, says, “Weigh the cost and complexity up against your genuine intentions to expand into the US.” At the end of the day, it will come down to the founders’ judgment as to whether flipping the corporate structure will be worth it.
Keen to get up to speed with Delaware Flip pros and cons, courtesy of HSBC Innovation Banking and Frontline? Download our infographic, and read much more from our team on all things fundraising.
Any opinions expressed are merely opinions and not facts. All information in this document is for general informational purposes and not to be construed as professional advice or to create a professional relationship and the information is not intended as a substitute for professional advice. Nothing in this document takes into account your company’s individual circumstances. HSBC Innovation Banking does not make any representations or warranties with respect to the accuracy, applicability, fitness or completeness of this document and the material may not reflect the most current legal or regulatory developments. HSBC Innovation Banking disclaims all liability in respect to actions taken or not taken based on any or all of the contents in this document to the fullest extent permitted by law. Nothing relating to this material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
