Sunday, April 28, 2013

FLIP IT! A Guide to Flipping Your Company to the U.S.

What is a Flip? A flip (the “Flip”) is a legal mechanism by which all of the equity interests of one company (the “Foreign Co”) are transferred to another company (the “US Corp”) and all of the former equity interest holders in the Foreign Co receive proportionate equity interests in the US Corp instead. As a result of a Flip, the Foreign Co becomes a wholly-owned subsidiary of the US Corp. The Foreign Co continues to exist and often continues its operations. The only difference is that it now has a single owner, the US Corp.

How Does It Work? Let’s see how a Flip works using a fictional company, Mobilka Rus Ltd.

Background. Mobilka Rus is a limited liability company formed under the laws of the Russian Federation. It has created and owns intellectual property and released a mobile app. It has raised seed capital from an investor in Russia, and has hired a few employees in Russia as well. Mobilka Rus is owned by its two founders, Dima and Sergey, who each hold 40% of Mobilka Rus, and by their investor, Dengami Investments, which owns 20%.

Step 1. The first step to performing a Flip is to incorporate a brand new corporation in the U.S. Our friends at Mobilka Rus incorporate Mobilka US Corporation in Delaware. Mobilka US gets a set of bylaws, a board of directors that Dima, Sergey and Dengami Investments all agree on (composed of 3 members, one for each of Mobilka’s owners) and is ready to go.

Step 2. Next, Dima, Sergey and Dengami Investments enter into a Share Exchange Agreement with Mobilka US, pursuant to which they transfer their entire ownership interest in Mobilka Rus to Mobilka US, such that Mobilka US becomes the 100% owner of Mobilka Rus. In exchange, Mobilka US issues shares of its stock to Dima, Sergey, and Dengami Investments based on their ownership interest in Mobilka Rus. Therefore, Dima and Sergey get 4,000,000 shares of Common Stock of Mobilka US each, and Dengami Investments gets 2,000,000 shares of Series Seed Preferred Stock. The ownership percentages are preserved, only now, instead of sharing ownership of Mobilka Rus, Dima, Sergey and Dengami Investments are holders of 100% of the issued shares of Mobilka US, which, in turn, is the holder of 100% of the ownership interest in Mobilka Rus.

Step 3. Then the ownership of Mobilka Rus must be changed on the official share register of Mobilka Rus, which requires several administrative steps.

Step 4. Having completed the Flip, Mobilka US approaches VCs in the US to raise money. The investment will be into the “business” of Mobilka Rus, since Mobilka US doesn’t have any operational business, but they will make the investment by purchasing Preferred Stock in Mobilka US, which is a Delaware corporation with a familiar structure and feel.

Why Do Companies Flip? Companies interested in orchestrating a Flip generally share the following characteristics:

  • they are organized in a foreign jurisdiction;
  • they are operational and may already have raised capital, created intellectual property, hired employees, and/or begun selling products; and
  • they are interested in creating a U.S. presence that will allow them to (a) raise capital in the U.S. and/or (b) to move some of the operations to the U.S.

Following a Flip, the Foreign Co will continue its operations in the foreign jurisdiction without interruption, while the US Corp will either become a fully-operational U.S. headquarters or merely a holding company, depending on the Foreign Co, its business, and plans.

In our example above, Mobilka Rus can continue to operate in Russia, hire more Russian employees, and continue to develop intellectual property by building out its existing app or creating new ones. The only difference is that Mobilka Rus is now owned by Mobilka US. This enables U.S. investors, who are conservative and usually reluctant to invest in a Russian (or almost any other foreign) company directly, to invest in Mobilka US, which is a U.S. corporation, and to have the comfort that they are investing in the business of Mobilka Rus.

Happy company making!

Inna


White Summers  Inna Efimchik, a Partner at White Summers Caffee & James LLP, specializes in assisting emerging technology companies in Silicon Valley and beyond, providing incorporation, financing, and licensing services as well as general corporate counseling.
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4 comments:

  1. Hi Inna,

    Lets say I have an american company and I want to use some money from that company to cover first expenses of my new startup. Under "first expenses" I mean hosting, domain name and other infrastructure costs. Later, when "the proof of concept" of my idea will work I want to incorporate the separate copr and transfer all IP to the new corp. How is complicated to do? And what is the better way to do it?

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  2. It's not uncommon for an existing company to incubate a new project and to spin it off into a new company when it's ready -- either when it can function as a stand-alone business or when there are investors that want to invest into it separately.

    I am not sure what the measuring scale would be here for the level of complexity. It's certainly doable and done.

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