Reverse Flips: Why Some German Start-Ups Unwind Their U.S. Holding Structure, and Why Many Still Choose It

Deutsch: Reverse Flips: Warum manche deutsche Start-ups wieder Abstand nehmen von ihrer US-deutschen Holdingstruktur und warum viele sie weiterhin wählen

Orrick partner Sven Greulich spoke with Handelsblatt, Germany's leading business daily, about "reverse flips."

Many German start-ups still "flip" from a purely German company structure, typically a GmbH, into a two-tier U.S.-German holding structure with a U.S. parent company, usually a Delaware corporation. Others adopt that structure from the day they are founded. However, some companies are going the other way. In a reverse flip, a company unwinds the U.S. holding structure and returns to a purely German setup.

Sven identifies five main reasons companies consider a reverse flip:

1. Difficult fundraising in the U.S.: U.S. investor conversations haven't produced the expected results.
2. Complexity and cost: Running a company under two legal and tax systems brings significant advisory and administrative costs.
3. Investor reluctance: Some investors won't take on the tax risks and compliance burden of a dual structure.
4. European sovereignty: Companies want more "European sovereignty," and some are unhappy with the direction of U.S. government policy.
5. Access to European markets: A German structure can make it easier to work with public-sector clients and in regulated industries across Europe.

A reverse flip is not a simple exercise, however. It is complex from both a legal and a tax perspective, especially for companies that have been operating longer and have built significant enterprise value. It can involve substantial transaction costs and, in some cases, major tax consequences.

Despite some recent reverse flips, the U.S.-German holding structure remains an attractive option for many founders. Its advantages include eligibility for leading accelerators such as Y Combinator and better access to U.S. investors, customers and talent.

Read the full Handelsblatt article here (German language, paywall). For more on U.S. holding structures for German start-ups, see OLNS#7 – Flip it Right: U.S. Holding Structures for German Start-ups, part of our Orrick Legal Ninja Series.