The US flip is a corporate restructuring transaction consisting in a non-US company becoming the subsidiary of a newly established US holding company, often incorporated as a Delaware corporation. This transaction allows US investors to invest more comfortably in foreign startups, simplifying their legal due diligence and tax process while acting in a familiar environment.
Unlike many founders who establish their startups in the US from the outset, many Italian startups are incorporated in their home country, raising early-stage funds in Europe before landing in the US market. By this stage, the US flip often becomes the path to success. The process involves:
- the incorporation of a Delaware corporation (“US Inc”) as a new US holding company;
- the transfer of shares from the existing company (“HomeCo”) to US Inc, turning HomeCo into the wholly owned subsidiary of US Inc;
- the transfer of the operational assets of HomeCo to US Inc, in order to pursue its business in the US.
Alternative approaches might be explored as the size of the HomeCo’s business growths.
In the flipping process timing is critical, as a US flip can be complex and is challenging to reverse. It’s advisable not to wait too long should a US market entry be planned, although waiting for a US fund’s request can validate the decision. Expert advisors in relation to cross-border legal and tax issues are crucial to navigate the complexities, timelines, and jurisdictional differences involved.
Startups choose the US flip primarily for the following reasons:
- accessto capital: the US has the world’s largest venture capital market, with US funds’ activity traditionally focused on US incorporated companies, especially Delaware corporations. These corporations are preferable due to investors’ familiarity with Delaware’s legal structure, simplified processes for legal and financial due diligence, and favorable tax implications. On the contrary, most European countries (including Italy) lack a mature venture capital market outside the main experienced hubs (e.g., London). European startups often raise early-stage capital locally, but have difficulty finding investors for later-stage rounds. The US market, with significantly larger funds, is more suited to substantial growth-stage investments, enabling quicker scaling and smoother exits;
- valuation: US based startups often achieve significantly higher valuations than the Italian ones, which can be pivotal for attracting top-tier investors. This is largely due to the dual-company narrative, where a business operates both in the US and abroad. US investors value this international footprint and the ambition it represents, often resulting in more competitive valuations. A higher valuation enables the startup to secure more capital with less equity dilution – a major advantage in preserving control for founders and early investors;
- market perception and credibility: establishing a US presence is frequently perceived as a major credibility boost. Many investors perceive US-based companies as inherently more ambitious and globally oriented, which positively affects the company’s brand and investment attractiveness. This international standing not only enhances the startup’s visibility but also reflects a commitment to high growth potential, making it easier to build relationships with partners and customers who prioritize innovation and global reach;
- reduced bureaucracy and business-friendly environment: the US business environment reduces bureaucratic difficulties and supports new businesses with tax incentives. The Qualified Small Business Stock (QSBS) exemption, for example, allows founders to benefit from significant tax relief on gains up to $10 million under certain conditions, which can be advantageous when selling a company. On the contrary, European countries generally have high tax rates on capital gains, and founders often face complex bureaucratic obstacles when transferring or selling assets;
- exit opportunities: the US also offers better exit opportunities, whether through acquisition or public listing. Startups structured as Delaware corporations are more likely to be acquired by US technology companies. Additionally, listing on US stock exchanges offers alternative listing mechanisms like Special Purpose Acquisition Companies (SPACs), which provide simplified paths to public offerings compared to traditional IPOs. Without an American holding structure, European startups could find their exit possibilities significantly limited;
- talent pool and opportunities: although Italy in recent years has been trying to mitigate the gap with the US by, for example, creating new startup hubs, granting access to public state aids – through, for example, “Cassa Deposito Prestiti S.p.A.” and “Agenzia nazionale per l’attrazione degli investimenti e lo sviluppo d’impresa S.p.A. (Invitalia)”, i.e. public agencies that allocate funds to startups on the basis of their projects/businesses – and implementing new pro-startups regulations, the US offers more opportunities. The presence of renowned tech hubs like Silicon Valley gives startups unparalleled access to experienced professionals and thought leaders. This vast talent pool can be invaluable for scaling operations, accelerating R&D, and fostering an innovative, forward-thinking culture – key factors that often give US -based startups a competitive edge in global markets.
On the one hand, by leveraging these advantages, an Italian startup is able to unlock significant growth potential, access top-tier talents, and place itself as a credible and high-value player on the global stage. On the other hand, in cross-border reorganizations tax considerations are crucial. Moving a company’s primary center of interest abroad may imply significant tax obligations if not carefully structured. For example, Italy’s “exit tax” may apply, requiring a thorough evaluation of any asset transfers to avoid unintended tax liabilities. Moreover, US corporate income tax rates vary by jurisdiction, including federal and state-level taxes, which can fluctuate widely.
In summary, a US flip can be a powerful move for Italian startups targeting US investments and US market. Although it requires careful planning and expertise, the potential to access the world’s largest venture capital market and increase exit options makes it a worthwhile decision for ambitious startups ready for global expansion.