Unlocking global potential: Why German start-ups should consider a US holding company

Many founders and investors of German start-ups frequently ask whether they should establish a US holding company, either by flipping an existing German Unternehmergesellschaft/GmbH or setting up a new US/German structure. This approach offers several benefits, including better access to financing in the US and improved exit opportunities.

However, executing a flip is a significant corporate undertaking that involves various potential drawbacks and requires close collaboration between founders, investors, and experts in law, accounting, and tax from both sides of the Atlantic. Early consideration of a US/German two-tier structure is advisable, as a later-stage flip can become more complex and tax-expensive.

What is a (US) flip?

A (US) flip involves the interposition of a US holding company (usually a Delaware corporation, referred to as the "HoldCo") between a German company (usually a GmbH, referred to as the "OpCo") and its shareholders through a share swap. In this process, shareholders "swap" their shares in the German company for shares in the HoldCo, effectively creating a share-for-share transaction. This structure enables the German company to benefit from the advantages of being part of a US corporate structure.

Background: Why establish a US Holding company?

A German company may decide to establish a new US holding company for various reasons:

• Access to investors: The US market is one of the most important sources of venture capital and other private financing. Private Equity and VCs are generally most comfortable with the corporate mechanisms available in a US company.
• Financing and liquidity: Some of the world's leading stock markets are in the US. An initial public offering (IPO) and listing on the NYSE or NASDAQ can lead to better access to capital and provide a potential route to liquidity.
• Better exit options: A sale to a US acquirer is often seen as an ideal potential exit. A sale of shares in a US holding company can facilitate such an exit scenario.

Key issues for US flip transactions

When structuring a flip transaction, where shareholders in an overseas company exchange their shares for shares in a new US company, several key issues must be considered:

• Tax planning and clearances: Identify and minimize tax implications for current shareholders.
• Cap table review: Decide on the participation of smaller shareholders.
• Relocation of management and/or employees: Consider relocation terms and visa processes.
• Incorporation in the US: Typically as a Delaware corporation, based on commercial needs.
• Share exchange/flip process: Determine the method of exchanging shares.
• Overseas company shareholders: Ensure compliance with securities laws based on shareholders' country of residence.
• Overseas company employee participations and warrants (venture debt): Decide how to handle existing (virtual) shares, options of employees and warrants.
• Business or asset transfer to the US: Consider third-party consents and tax implications.
• Intercompany arrangements: Define roles post-flip and document with appropriate intercompany agreements.

Read the full guide on how to set up a US/German structure here.