Italy Founder Series: The Delaware Flip. A Bridge for Italian Startups to the U.S. Market


4 minute | January.23.2025

Italiano: Il Delaware Flip. Un ponte per le startup italiane verso il mercato statunitense

The United States represents a flourishing capital market and an advanced technological ecosystem, making it an attractive destination for startups worldwide.

For European startups, particularly Italian ones, though, attracting direct U.S. investments can be a significant challenge. A corporate restructuring strategy known as the Delaware Flip can open the doors to the world's largest venture capital market, fostering growth and exit opportunities for startups ready to expand globally.

What is the Delaware Flip?

A Delaware Flip allows a non-U.S. company to become a subsidiary of a U.S. holding company, typically established as a Delaware corporation. This makes the company more appealing to U.S. investors by simplifying due diligence processes and tax management.

Many U.S. venture capital funds prefer to invest in companies incorporated in the United States, particularly in Delaware, due to familiarity with the corporate structure.

Advantages of the Delaware Flip

1. Access to Capital: The U.S. represents the largest venture capital market in the world. European startups, often limited in fundraising beyond the initial stage, can find fertile ground in the U.S. for raising significant growth capital. The Delaware Flip structure facilitates access to these funds, making startups more attractive to U.S. investors.

2. Valuation: Startups in the U.S. often receive higher valuations compared to their European counterparts. This can allow a startup to secure more capital while giving up less equity.

3. Market Perception and Credibility: Being based in the U.S. can enhance a startup’s credibility and visibility. The “U.S. flip” can signal ambition and global reach. It also can attract investors, partners and customers.

4. Greater Exit Opportunities: Delaware corporations are easier for U.S. companies to acquire. They also face fewer obstacles going public. Tools like Special Purpose Acquisition Companies (SPACs) further simplify the process compared to a traditional IPO.

5. Business-Friendly Environment: The U.S. offers a favorable entrepreneurial environment. It has less bureaucracy and offers tax incentives like the Qualified Small Business Stock (QSBS) exemption. That can provide significant tax benefits to founders.

6. Talent Pool and Opportunities: Although Italy is trying to bridge the gap with the U.S. by creating startup hubs and offering state aid, the United States offers a large pool of experienced talent recognized worldwide, advantageous for scaling the business and driving innovation. That is particularly true in tech hubs such as Silicon Valley.

Disadvantages of a two-tier structure

The main disadvantages involve added complexity and increased costs.

  • The two-tier structure introduces significant complexity to a business. It involves navigating a U.S. legal system that may be unfamiliar to Italian startups alongside Italian corporate and tax frameworks.
  • Founders must also be mindful of tax pitfalls associated with a two-tier structure. The U.S. governance system differs significantly from Italy's. It can lead to increased duties and liability risks for directors and officers.
  • Setting up a holding company in the U.S. might expose the startup to litigation earlier than anticipated.
  • Legal costs in the U.S. are generally higher than in Italy. Setting up a two-tier structure can create substantial out-of-pocket expenses, potentially reaching tens of thousands of dollars, especially if the flip involves complex tax considerations
  • Commercial contracts with U.S. customers tend to be negotiated more aggressively, further increasing legal costs.

How a Delaware Flip Works

The process involves:

  • Establishing a Delaware Corporation (USAcorp) as the new American holding company.
  • Transferring shares of the original company’s (HomeCo) shareholders to USAcorp, turning HomeCo into a wholly owned subsidiary of USAcorp.
  • Restructuring to ensure USAcorp holds the operational assets, keeping HomeCo operational as a subsidiary.

Two alternative approaches involve HomeCo:

  • Licensing its intellectual property rights to USAcorp in exchange for shares, though this may have tax implications for HomeCo.
  • Transferring its legal seat from Italy to Delaware, domesticating as a USAcorp.

When to Consider a Delaware Flip

Choosing the right time is crucial, as the Delaware Flip is complex and difficult to reverse.

Startups:

  • Should rely on expert consultants capable of managing the regulatory complexities, timing and jurisdictions involved.
  • Should not to wait too long if they plan to target the U.S. market, although often waiting for an explicit request from an U.S. investment fund can confirm the necessity of the operation.

Tax Aspects

Transferring the main center of interests abroad can entail significant additional taxes if the operation is not carefully planned.

A taxable event: In Italy, the share swap involved in a Delaware Flip is considered a taxable event, similar to a sale. Unlike share swaps involving EU/EEA companies, a flip into a company organized under U.S. law cannot be executed on a tax-neutral basis. As a result, when implementing the flip, the current shareholders of the operating company (HomeCo) will record a gain or loss based on the difference between their tax cost and the normal value of the HomeCo shares the time of the transfer of the ownership to the holding company (USAcorp).

For Italian income tax purposes: The normal value of shares in a non-listed company shall be determined in proportion to the value of the company's net assets or, for newly established companies, to the total amount of contributions.

For corporate shareholders: Capital gain is subject to corporate income tax and eligible for the participation exemption regime (i.e. the 95% of the capital gain is exempt) if the investment meets the requisites indicated in article 87 of the Tuir.

This exemption applies if the company resides in a state that allows for an adequate exchange of information and conducting a commercial activity and if the shares are:

  • Held for 12 uninterrupted months.
  • Classified as fixed financial assets.

Timing matters: Startups should time a flip to align with the three-year holding period required by the tax incentive regulations for innovative startups. If the flip occurs before this period expires, it could result in the recapture of the investment benefits received by the HomeCo shareholder.

The Corporate Income Tax (CIT): The U.S. government imposes a 21 percent corporate income tax. Most U.S. states also charge a corporate tax, with the rate varying state to state. Delaware offers a favorable tax structure, but activities in other states may incur additional taxes, with rates based on revenue, personnel costs and the location of operational offices.

Want to know more? Our Tech Team can help you consider and structure your company’s flip. Contact one of the authors to learn more: Flavio Notari