In the world of venture capital in Latin America, one of the legal procedures every startup aspiring to succeed should undertake is a flip. In this article, we explain what a flip is and why it is a key requirement for startups in Latin America, as well as when the right time to do it will be and what considerations to keep in mind to make the right decision for your company.
What Is a Flip?
A flip, or Foreign Legal Incorporated Company with Primary Listing, is a legal technique used by startups in Latin America that involves moving a company’s legal domicile from one country to another.
This move typically involves relocating a startup’s HQ from a Latin American country to a jurisdiction in the United States (such as Delaware) or the Cayman Islands to create a Cayman Sandwich, with these 2 jurisdictions being the most commonly used by LATAM startups.
It is worth noting that, in addition to this new company established in a new jurisdiction, the existing company continues to exist, but now becomes an operating subsidiary.
Why Should Startups Do a Flip?
Startups typically make this move to gain access to international investors and adopt a legal structure that allows them to grow rapidly across multiple countries without putting the company’s primary entity—the holding company—at risk.
But why do international investors feel more comfortable with a jurisdiction outside LATAM? These are usually the reasons:
- The jurisdiction is more startup- and investor-friendly when it comes to an exit.
- The jurisdiction is familiar to and accepted by sophisticated investors.
- Some investors already have their legal structure in these jurisdictions, making it easier to make the investment.
- Political risk is usually lower.
How to Do a Flip
The “flip” process involves a series of legal steps and requirements. The most common steps are:
1-. Planning. The startup should research the destination country and determine whether it offers competitive advantages, a favorable regulatory framework, and access to investors.
2-. Choosing the destination country. You should select a country that meets the
startup’s needs and where it can access a primary securities listing or well-established capital markets. To learn about the 3 most common options for startups, we recommend these articles:
3-. Establishing a legal entity. The startup should establish a new legal entity in the destination country, which will act as a subsidiary of the original company.
4-. Regulatory approvals. Obtain all necessary approvals and permits from local and regulatory authorities in both the country of origin and the destination country.
5-. Transfer of assets. The original company’s assets, intellectual property, and technology are transferred to the new legal entity.
Costs and Timeline for Doing a Flip
The time and cost of a flip may vary depending on the jurisdictions involved. However, as a founder, we recommend allowing at least two to four months as the minimum time this move may take, and keeping in mind that the cost of a flip may start at an average of US $10,000 depending on various factors such as legislation, the new structure, the number of investors and partners, signed investment documents, and so on…
Legal Structure After the Flip
If you chose the Cayman Islands as your jurisdiction, your international legal structure for a Cayman Sandwich will look like this.
On the other hand, if you chose Delaware, United States, for an LLC or C-Corp, we recommend checking out this article to learn about its advantages and disadvantages.
Conclusion
Finally, remember to always seek advice from lawyers, accountants, and tax advisors you trust. If you don’t have any yet, you can find several recommended providers through Startuplinks in our marketplace.