When investors put money into companies, they want shares or convertible securities in return, along with the ability to get their money out when things go wrong. Investors also want some control over the company to maximise their return. To ensure their objectives are met, investors will want to ensure they can enforce their rights. The venture capital market may be increasingly global, but investors prefer a safe haven to ensure this happens.
In Southeast Asia, that generally means Singapore is the place to register – it’s the clear leader in terms of infrastructure and legal protections. There are other drivers of course which could be relevant when choosing jurisdiction.
For example, protection of intellectual property rights, taxation, local-foreign ownership and capital requirements, and the ability to take proceeds out of the country.
When should founders flip their startup?
Generally speaking, you should avoid the need to flip by incorporating your holding company from the outset in the most investment friendly place. But that’s not always possible, e.g. if you have received local seed money or grants to finance the early stages of the business. However, if you decide to flip your company, then the earlier you act the better. Otherwise, the potential restructuring can be harder, e.g. intellectual property rights and key commercial and employment agreements may need to be assigned to the overseas incorporated company.
Often, startups can feel pressured to flip at the same time as a proposed capital raise, sometimes at the request of investors. Founders should exercise caution here. Terms sheets are non-binding and promises of investment based on the company flipping may not materialise into an actual investment.
Flipping simply involves registering a holding company (the New Holdco) in the new host country, e.g. Singapore, with the shareholders of the existing company swapping their shares for an equivalent number of shares in the New Holdco. The end result is that the existing company is wholly owned by the overseas New Holdco.
An alternative approach for very early stage companies is to simply set up the New Holdco and transfer any relevant IP, other key assets, contracts and employees to that company. This is a different transaction and leaves the old asset-less company owned by the existing founders and shareholders. Often, that old company would then be wound up.
Issues to watch out for
Flipping generally involves a share transfer in the existing company and an issue of new equity in the New Holdco. These are separate corporate actions in two different countries, so you should take legal and tax advice on both.
The transfer of shares needs to be executed in the same way as any other share transfer, i.e with the usual stamping, approvals and registrations that are required under the applicable law. However, as no cash passes, founders should check how the transfer needs to be recorded for accounting, legal and tax purposes, e.g. the transfer may represent a capital gain.
The share transfer may constitute a change of control or liquidity event under the company’s existing commercial contracts, financing documents or leases. You should review existing documents and seek the consent of relevant third parties if required.
Convertible securities that have been issued to investors will need to be reissued by the New Holdco existing shareholders’ or founders’ agreements.
Together with the company’s constitution and any share option plan, may need to be restated at New Holdco level and adapted for the new local law.
Finally, check whether the existing company can be wholly owned by the New Holdco. It is quite possible that a resident shareholder may need to retain some of the equity due to foreign ownership restrictions.
Moving on to Delaware?
While Singapore continues to grow as a hub for global venture capital, if the ultimate destination is the US, then founders may wish to flip the company to Delaware early on. The share-for-share exchange mechanics for this are broadly similar to those discussed above. This is subject, of course, to specific US legal requirements and taxation issues.
Romesh Jayawickrama, Founder and CEO of online investment banking platform BankerBay, which flipped from Singapore to Delaware in 2014, said:
Early stage investors make their investment decisions based on two key questions: (1) Do I believe in the concept? (2) Do I believe in management?
These are the key risks that they are willing to make a bet on. They are not however willing to take other risks associated with an unfamiliar legal jurisdiction or regulatory framework, or with a management team being based on the other side of the world. As BankerBay is an investment banking platform, it was critical to be headquartered in the epicentre of global financial markets, New York.
Flipping our assets from Singapore into a Delaware-C entity with a physical office near Wall Street was therefore an obvious choice, being close to our investors and clients. The process was relatively straightforward, although the legal documentation can seem onerous involving several US specific declarations and disclaimers.
The author is a corporate lawyer at technology law firm, Simmonds Stewart. He advises investors and start-up companies on venture capital and tech M&A transactions across Asia Pacific.
The views expressed here are of the author, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, please send us an email to writers[at]e27[dot]co