US incorporation? Just do it.
Why you should incorporate your non-US enterprise tech company in Delaware
In over 15 years of enterprise tech investing across Europe and Israel, the question of where to incorporate the ultimate parent company (the “topco”) comes up regularly. When it doesn’t come up — and if it’s not too late (see below) — I usually bring it up. To cut to the chase — the answer is (almost) always Delaware, if you can (and if it’s not too late).
Let me start off with some data points:
- I’ve been directly involved in over 40 investments across Europe and Israel, Of these, about half were incorporated in the US. The rest were incorporated in Israel, the UK, Sweden, and Germany.
- Angular Ventures has already backed about twelve companies from across Europe and Israel (across six countries), nine of which are incorporated in the US (Delaware).
- According to Angular’s data set of enterprise tech exits from the past five years, over 90% of the exit value created by European or Israeli enterprise tech companies was created by companies that (1) exited in the US market, (2) had offices in the US, (3) raised money from American VCs, or (4) some combination of the above.
- In 15 years of supporting non-US founders in building enterprise tech business, I’ve never heard a founder regret incorporating in Delaware. I have come across several instances where founders have lamented the fact that they did not incorporate in Delaware when they had the chance.
The answer, at least in my mind and based on my experience, is clear as day: whether you come from Tallinn or Tel Aviv, London or Lisbon — incorporate in Delaware. But founders are surrounded by advisers and there is a lot of contradictory advice swirling around.
Pros, cons, and red herrings.
Below, we’ll take a closer look at the arguments surrounding where to incorporate — and we’ll break it down into cons (legit reasons to not incorporate in Delaware), red herrings (false reasons to not incorporate in Delaware), and pros (the real reasons why incorporating in Delaware usually makes sense).
To the inevitable critics of this approach: European tech is having a moment now: it’s here to stay, and we are building big companies in Europe. Israel has been a powerhouse for some time. So it’s tempting to argue that focusing on success in the US is no longer necessary. I think that’s the wrong conclusion to draw. We may one day get to a point when its easier to get to a big enterprise tech exit in Europe than in the US, but we are not there yet — not even close. I am among the biggest cheerleaders for European tech, but this post is not about cheerleading. It’s about how non-US enterprise tech CEOs should go about configuring their enterprise tech companies for success by removing friction. Advocating for Delaware incorporation is not advocating against Europe or Israel — it’s just recognizing that in the real world some paths are easier than others.
Caveat: I am not a tax lawyer, so this post is neither tax advice nor is it legal advice. This is business advice. You should always consult with a lawyer before making these decisions…
Caveat to the caveat: …but make sure you are talking to the right lawyer! As I’ll argue below, it really matters which lawyer you consult with. Asking a local lawyer who realizes that if you flip he/she will eventually lose all your business is not a good way to get unbiased advice.
The cons: Why not to incorporate in Delaware
- One-time tax hit. The real cons of a flip to a US topco consist only of a potential tax hit to founders. This depends on the tax law of the country they reside in / pay taxes in. For UK and Israel, for example, there are generally no tax consequences to flip into a US topco. In Germany and many other countries, the situation is very different. There are usually ways to avoid this. The best is to incorporate in Delaware from day one or conduct a flip before your company has generated any value (before any term sheets).
- Government aid. Another potential con of a flip is loss of access to subsidies and other government aid that requires incorporation in the local country. I don’t take this seriously. First of all, good companies can usually access investor cash and don’t need government handouts. Second, many governments recognize that jobs are jobs and don’t condition their support on the topco jurisdiction.
- Cost. There is some cost to a flip. Sometimes it’s easy and quite inexpensive (if done early), but sometimes it’s complex and expensive. As an investor, however, I will gladly increase the size of my investment to help cover these costs because the flip to the US is an important early step in your global expansion (which is why we are here in the first place). More generally, however, the costs of a flip are incurred only once and pale in comparison to the costs of not flipping or trying to flip later.
- Complexity. There is also some complexity to running two companies (the Delaware topco and your local operating company). I know because Angular Ventures is set up this way. But the complexity is easily managed, and impossible to avoid because you will eventually need a US entity when you open US operations anyway — so this is just biting the bullet early and setting yourself up for success.
Red herrings: The false narrative against flipping to the US
- Tax liability. With the possible exception of the flip itself, the jurisdiction of the topco has little impact on a founder’s tax situation. If you are not a US tax payer, you don’t pay US taxes. If you are a US taxpayer, you do pay US taxes even if you reside outside the US and own a foreign company. Tax treaties ensure you will never be double-taxed in any event. Good tax advice is essential and worth every penny. Invest in good tax advice — but don’t let tax fears drive your decision about incorporation.
- Tax rates. Some founders have argued to me that they prefer a non-US jurisdiction because of some personal tax situation. Usually, this involves incorporating in an “exotic” jurisdiction, which is a major red flag for other reasons, but it can sometimes push a founder to choose a mainstream but non-US jurisdiction. In my mind, this is a pretty clear case of misaligned priorities. Your priority should be to do what is best for the business (i.e. to pay tax on the largest possible gain) as opposed to what is best for your personal tax rate in the short term.
- Local acquisitions. There are certain edge cases in which it is easier for a UK or Germany company to acquire another UK or Germany company as opposed to a US company. This may be true — but given that the vast majority of large enterprise tech acquisition happens in the US, configuring your company to optimize for a local exit is a good way of signaling that you are not convinced you have a global opportunity in front of you.
- National pride. I’m all for national pride. I just think the best way to express national pride is to build an enormous business with hundreds of employees in your local market. The best thing you can do in service of national pride is to build the global leader in your category. Take over America. Fly your flag in New York or San Francisco. Proudly talk about your roots. But none of this has anything to do with where you incorporate.
Pros: Why Delaware
Ultimately, the reason to incorporate in the US is the same reason that US-based companies from New York to New Mexico end up incorporating in Delaware, a relatively small state on the East Coast known mostly for the fact that everyone incorporates there. The reason is alignment with expectations. It’s just easier to do what everyone else does. There is more precedent. The majority of your employees, customers, investors, partners, and acquirers are just going to be more familiar and comfortable with a Delaware topco than anything else. You can conquer the world from anywhere — but your job is hard enough. Alignment of the topco jurisdiction is one way to make your life as a founder that much easier.
- Hiring. If a company plans to hire aggressively in the US, being able to offer senior US hires equity in a US topco is superior to offering them equity in a UK/Canadian/Israeli/German topco. Americans are usually more comfortable getting shares in a US company; and in a competitive job market, this can be an advantage.
- Employee stock options. Not all jurisdictions allow employee stock options as readily as the US. This alone can be a sufficient reason to incorporate in Delaware if you are based in a country where employee stock options are challenging.
- Fundraising. The majority of truly good VC funding options for Series A and beyond enterprise tech are US VC funds — and many of them have either (1) a subconscious preference for US topcos or (2) an actual prohibition on investing outside of the US. Having a non-US topco can make a fundraising process more complicated and adds an additional point of friction for some (not all) investors. They worry about labor law, tax law, IP law, or other issues. They worry about the “unknown unknowns” of jurisdictions they don’t understand, and the need to get local legal counsel etc. I always prefer to remove this barrier if possible.
- Acquisitions. The same is true of US acquirers. For nearly all enterprise tech businesses, the plurality (if not the overwhelming majority) of potential acquirers are US-based. Many of them (but not all) will typically have some preference (conscious or unconscious) for acquiring US subsidiaries. While this will not stop a super important acquisition, it can make things tougher and is just an additional barrier a company will have to fright through if it’s not US incorporated.
- Most important — signaling. Founders should not underestimate the immensely positive signaling impact of flipping their non-US company to the US. I have made more intros to US VCs of non-US companies that I can remember. The sigh of relief when you tell them you have incorporated in Delaware is noticeable. Partially this relates to the points above, but it’s mostly about signaling. Flipping to the US is a way of “burning your ships” and signaling that you will do whatever it takes to build a big company. VCs like that. It shows them you are serious. That has a big impact on them — and an even bigger impact on the founders themselves.
While the pros are not easily quantifiable, they are very real. If a flip can be done without severe tax consequences for the founders, it’s almost always the right call for an enterprise tech company.
A few additional points:
Timing. The cost, complexities, and tax implications of a flip are always minimal at the beginning and just get worse with time. In my experience, it is a complete fiction to think that flipping later is possible. It is not. Thus, founders are making a decision early on that is basically irreversible. My strong advice to any enterprise tech founder is to bite the bullet and flip the US as soon as possible.
Day one. The absolute best way to do this, of course, is to incorporate in Delaware from the get-go.
I don’t care about the “I don’t cares.” A lot of smart investors are increasingly saying that they “don’t care” about where a business is incorporated. Angular is the same. We will invest wherever it makes sense, and jurisdiction won’t stop us. This growing investor flexibility is good news, but it shouldn’t guide your decision-making. First, you have to make this decision based on the people that do care or will care (rightly or wrongly). You may not always be dealing with people who don’t care. Second, even if someone says they don’t care, that doesn’t mean they are not subject to subconscious biases. Remember that a lot of this is about signaling.
Get advice. These are complex and consequential decisions. I am not arguing that US incorporation is optimal in all cases — but to me, it’s the starting point for any enterprise tech company with global ambition, the default choice from which a founder will need good reasons to deviate. Before making this decision consult with investors, with lawyers, and with advisers — but be very aware of biases. The worst advice will come from firms or individuals that only operate in one market. They will inevitably find reasons to convince you to take steps that benefit them (i.e. incorporating in a jurisdiction where they operate). This is not malice, but it is a mix of habit and bias, and it can be suboptimal. Many lawyers only work in one jurisdiction and many investors (especially with government backing) are limited to investing only in one preferred jurisdiction. That is their world — but it’s not yours. Geographically flexible investors (like Angular Ventures) and law firms with truly global operations (that will make a fee no matter where you are incorporated) are a much better source of perspective here.