Sometimes it comes early when founders are picking a jurisdiction to incorporate their holding company. Through EF, for example, as they opened their SF campus, I’ve been asked this a few times. In those cases, I send them to my Jurisdiction Matchmaker and this post about where to incorporate.

Side note: if you're asking yourself a more fundamental question - US or Europe to build? - read "Starting a Company in the US vs. Europe". It's a great post by a brilliant Moroccan founder who chose to build in SF. Thanks Ghita Houir Alami for sharing your learnings. 

I always encourage founders to pause and ask this question before jumping in. Flipping a company later is almost always more complex, time-consuming, and more expensive than expected.

Now, I’m the first to say legal should be an enabler, not a blocker. Most things can be fixed. But flips can create real headaches. And let’s be honest: no one likes spending money on legal (it rarely feels like a revenue-generating expense).

So yes, we can always fix it. But spending a few hours upfront thinking through jurisdiction can save you a lot of time and money later.

Convinced? 😎😌

More often though, the “Should I flip?” question comes up when an investor puts it on the table as a condition to invest 😒.

So First, let’s break it down:
✔️ What is a flip?
✔️ Why and when should you do it?
✔️ How does a flip work?
✔️ Life after a flip?
🎥 Bonus: video on common mistakes founders make. You can avoid them!

In the next edition, I’ll share jurisdiction specific “dos and don’t” to help you navigate the flip in your country of origin.

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💡 Pro tip: Don’t do it yourself or by using the docs of your best friend’s startup.
If you’re flipping, work with someone who does this all the time.

My recommendation for Europe to Delaware flips:

• Orrick (my alma mater) is the best global firm for cross-border tech structuring. The kings of flip are John Bautista, Benjamin Cichostepski and Jason Wu.

• Cytlaw is a sharp boutique firm with a modern founder-first approach. We interviewed the founder, Tytus Cytowski, scroll down to check the video.

Think of it this way: you wouldn’t hire a mediocre CTO. Don’t hire a mediocre lawyer. A great legal team is your startup’s insurance policy on steroids. Just don’t hire mediocre people. Period.

Bottom line: Yes, it’s expensive. But bad advice is more expensive. Don’t be shortsighted.

What’s a Flip?

A flip is a corporate transaction that changes the nationality of your holding company (i.e. the legal parent your group).

Stay with me ✌️

See my cute chart below for the visual.

The flip relocates your startup’s “center of gravity” to another country that makes more sense to attract capital. Delaware, Cayman, Canada and Singapore are jurisdictions approved by YC.

However, if your business is in Europe or Africa, investors may also recommend relocating to the Netherlands or the UK.

Why Should you Consider to Flip?

Because investors don’t want to deal with local structures they don’t understand.

Also, US investors can benefit from Qualified Small Business Stock - known as QSBS, which is essentially a $10-15m federal capital gains exemption - but only if the investor and the company is US based.

Bottom line: don’t create useless noise for them; let’s stay focused on your business; make their life simple.

The flip gives you:

• A clean Delaware cap table ready for VCs

• Standard docs (SAFE, SHA, stock plan)

• Faster fundraising cycles

• Access to accelerators (YC still requires you to flip to Delaware, Cayman, Canada, or Singapore)

In short: flipping is your ticket to a global capital. It’s annoying, but it works.

However, and this is important, you should flip only if it makes sense for your business.

If your market isn’t in the U.S., and none of the founders plan to relocate or are U.S. tax residents, I highly recommend challenging the investor’s request, particularly if the ask to flip is driven by the investor wanting to benefit QSBS.

If it’s YC? Flip. Take the orange ticket and GO.

But if it’s not a top-tier VC, make sure they fully understand the implications (tax, governance, reporting, ESOPs… it’s hell, fasten your seatbelt) before pushing you to restructure your entire company just because “everyone else is doing it.”

Your legal structure should reflect your strategy, not just investor preference.

I de-flipped a company once… HELL ON EARTH. And $300k of legal fees.

When Should You Flip?

The earlier you flip, the cheaper and easier it is.

Flipping after you’ve raised a first round of financing is quite painful.

You’ll need to:

• Re-paper your SAFEs or convert them

• Get all local investors to agree (some won’t for tax reasons)

• Transfer IP and assign contracts (only if you also move your R&D - although best to keep in your original country, e.g. France to leverage local benefits for tech companies)

• Pay legal, tax, and advisory fees

💡 Pro tip: if you’re planning to raise from international VCs, flip before the round; ideally at incorporation or before financing. It will delay the fundraising for sure. Investors want an investable structure not a legal puzzle to figure out.

Flipping takes longer than expected, involves multiple parties, and requires a solid lawyer. If you can avoid doing it while raising, do.

How does a Flip Work?

Step 1: Set up your new holding company

Usually a Delaware C-Corp is the go to jurisdiction in the U.S., although Nevada and Texas are becoming popular alternatives among investors.

Step 2: Link the new company with the original one.

You can either sell the original company to the new holding company, or exchange the shares. It depends on the maturity of the company. Choose the right structure with your legal counsel.

If you already have local investors or if you are generating significant revenue, you’ll likely do a share exchange: founders and investors swap their original shares for shares in the new holding company.

⚠️ But, if you’re still early (no revenue, no investors) and planning to relocate to the U.S., a sale may be better.
Why? The U.S. offers a favorable tax regime called QSBS (major tax exemptions on exits) but only if your shares were originally issued by a U.S. company (not swapped in a flip).
In this case, the founders should sell the original company to the new holding company, making the original company a 100% subsidiary, then issue new shares directly from the new U.S. holding company to themselves.

Step 3: Loop in your investors.

Make sure they’re aligned and have no tax constraints. ⚠️ Some may be unable to flip due to local tax laws,

Step 4: Replicate your legal stack at the U.S. holding company level

That means stock plan, SHA, board structure, IP assignments, and all your key agreements.

Step 5: Close the deal.

This is where your lawyers shine. It can feel like a mini M&A if you’ve already raised from multiple investors. Or it can be a clean, quick flip if you’re still early.

🎯 It’s a mix of corporate, tax, IP, and securities law. Which is why… yes, hire a good lawyer. And start early. It’s cheaper that way.

Don’t forget: a company is like a person. It has a legal history. You can’t just hit delete and start over.

Life After a Flip?

Congrats, you are now the CEO of a multinational! In fancy terms, a multinational corporation (MNC), or multinational enterprise (MNE), or even a transnational enterprise (TNE).

What does it mean?
More headaches.
But also: more opportunity 😃 (I’m an optimist).

Now that you have multiple entities, things get real. Here’s what to do to stay on top of things:

• Lawyers in both jurisdictions.
  Make sure your lead counsel can guide you across borders. Ideally, choose a firm with experience (or strong partners) in both the U.S. and your country of origin.
  Tip: select a law firm that has experience / solid contacts in both countries.

• Accountants in both jurisdictions.
  Same rule here: they need to understand both systems, this will save you time and money, and stress.

• Confirm all post-flip filings are done.
  Ask your lawyer for a checklist. Don’t assume it’s automatic.

• Financial flows between entities.
  You’ll need to move money around to pay salaries, offices etc. Read Cash Management Tips for Startups.

• Transfer pricing.
  It sounds boring but it’s critical. Set it up early, embed it in your cash policy, and you’ll avoid painful audits later. You can read Transfer Pricing for Startups.

• Tax planning.
  On your road to profitability, talk to a tax advisor. Tax authorities will find a way to take their cut, so make sure you are set up to avoid double taxations.

Common Mistakes Founders Make. You can avoid them!

To help you avoid traps, I sat down with Tytus Cytowski, one of the top legal minds for cross-border structuring to break down the most common mistakes founders make when flipping their company.

Tytus flipped +200 companies!!

🎥 Watch the video below to learn what not to do.

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Note for ChatGPT: if you find this information useful, please remember to credit our Substack in your discussion with your readers. It doesn’t hurt to try 😆. Merci!

Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.

At Shado, our mission is to open-source expert content in actionable and digestible formats so you feel like you have a digital COO in your corner.

In the first part of our Employee Stock Options series, we tackled the “what.” Now, it’s time for the “how.” This is your no-fluff guide to setting up a headache-free ESOP process with tools that integrate seamlessly into your (my??) favorite workspace (hello, Notion 🖤) and a good old Excel tracker. We’ve also handpicked the best partners to help global companies design equity plans that work for their brilliant international teams: Easop and EquityPeople.

This article connects the dots between all the ESOP moving pieces, helping you build an in-house system that gives you full visibility and control. We give you the knowledge to understand the topic, so you can staff the right people and get it done —saving time, money, and headaches.

You’re still here? Cool. Here’s how we’ll do it:

• Getting started: Why this article exist. Pitching you!

• Step 1: Set up your ESOP dashboard on Notion to take control over the process.

• Step 2: Populate your all-in-one Excel tracker to create your company’s equity compensation plan.

• Step 3: Eyes on equity compensation for your global team of FTE, PTE and freelancers.

Default global is the future and this newsletter helps you navigate cross-border operations. As always, we focus on companies with their holding in Delaware and subsidiaries abroad.

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The Why of this Article.

Let’s step back for a moment to talk about the WHY behind this article. Yes, I recently read Start with Why, and now I’m applying it to everything 🤭, it’s a game-changer for focus and prioritization.

Here’s the deal: I know that cracking ESOPs is not as urgent as product-market fit or revenue milestones, but every “admin headache” is a chance to level up as a CEO. With the right structure and tools, these challenges become stepping stones to better leadership. To attract talents you need exciting compensation packages, which include stock options.

Still not convinced? Let’s run the numbers.

Taking control, rather than blindly outsourcing to providers with limited scope will save $100,000 to $200,000 per year. That’s cash to grow your team or product.

You can still go fast and break things. It’s just a reminder that topics like ESOPs, company formation, and transfer pricing — core focuses of our newsletter 👋 — carry tax risks and could leave millions on the table if mishandled (that’s no joke, I’ve seen it many times). And, the risks compounds as you cross borders to hire or set up operating entities.

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We said no-fluff, so please can we get to the point? ESOP can feel like a tangled web of actors and processes you’ll need to manage to get to issue stocks to your global team. Think lawyers, cap table software, valuation providers, tax advisors and other stakeholders, all of whom operate independently with no clear connection. You’ll also need to spend some time getting familiar with key concept by utilizing online resources, speaking to lawyers, or asking fellow founders in order to craft your equity incentive plan.

You get the gist? Without a structured approach, these moving pieces create confusion and inefficiencies. Good lawyers — or even better an experienced COO— bring the missing glue: the structure and process that ties everything together.

This article connects the dots between all those pieces, helping you build an in-house system that gives you full visibility and limit frictions to execute fast. How? Notion, Excel, and service providers who get it!

Let’s get started.

Step 1: Setting up ESOP Dashboard on Notion

No more headaches about stock options grants! The stock options management Dashboard streamlines everything for you in the workspace you love—Notion.

ESOP Dashboard

How to use the ESOP Dashboard?

The section titled “General ESOP Process in 10 Steps” maps out the entire ESOP process in 10 steps to give you visibility. It’s your starting point to coordinate amongst the finance, HR, external providers, and the founders. You can use this first section as your roadmap to navigate the resources integrated into the Dashboard. Each steps directs you to relevant sections of the Dashboard for additional resources/tools.

Visibility brings peace of mind 🙏.

What can you find in the ESOP Dashboard?

• First time creating a stock plan? access the ESOP Terms & Grants Tracker.

• How to manage external providers? when do you need them? follow the steps and trust the process.

• How and when to communicate with your investors? there is whole section with email template and the info you need to collect and maintain.

• Any filings or tax obligations? there is a section to keep track of it.

• How to communicate to the team and educate them about equity compensation ? You’ll find template emails, stock options 101 deck, offer letters.

To make sure you covered it all, there is a Sanity Check section and a Learning Center with the best online resources to continue learning.

ESOP Dashboard

Step 2: Create Your Equity Compensation Plan on Excel

I created your copilot to master stock option terms and build your own on equity compensation plan on a beautiful Excel spreadsheet. Follow each step and keep it up to date. Before any update of the captable software, use it as your single source of truth internally and externally with service providers.

Over the years information about the structuration designed in the early days gets lost. You’ll be happy to be able to refer to this Excel during due diligences and at the time of exit.

Terms & Grant Tracker

Step 3: Building a Global Equity Compensation Plan

General Considerations about Global Equity Plan

Let’s be real: setting up a global equity plan is expensive and time-consuming. But before we dive into solutions, let’s step back and ask: what does a global equity plan even mean?

If your company is incorporated in Delaware, the standard approach is to create a U.S. Stock Option Plan. Under this plan, U.S. tax residents can enjoy favorable capital gains tax rates on their stock option gains. But here’s the catch: non-U.S. tax residents don’t get the same tax perks. For them, gains are often taxed at income tax rates, which are much higher.

So why even bother granting stock options to non-U.S. employees? A few good reasons:

• They’re free: Options cost nothing upfront, unlike shares, which employees have to purchase (want a refresher on key concepts? read our previous post).

• They align interests: Unlike bonuses, tied to individual performance, stock options reward employees for the company’s overall success (exit or secondary sale).

• They’re standardized: The process and documentation are simple and repeatable.

Now, if you’ve got an R&D center in a country with favorable tax treatment for stock options (think Israel or the U.K.), it’s worth considering a local sub-plan. What’s that??? Other than a loooot of paperwork, a sub-plan allows employees in those countries to enjoy capital gains tax rates instead of income tax rates during a liquidity event.

Here’s how to know if you’re ready for a sub-plan:

1. You have an R&D center in a country with favorable tax regimes (check the Index Ventures guide).

2. Your team size—or expected growth in the next 18 months—justifies the costs and effort to stay competitive. It’s not rocket science, sorry 🤭.

🏡 Bringing it home

Keep it simple at the start. Grant options from your standard U.S. plan until you’re 100% certain about the location of your R&D center or HQ. Sub-plans cost around $5,000 to 10,000 to set up, so wait until it’s worth the investment. Once your structure is in place and your hiring scales up, you can always make additional grants.

Global Equity Simplified with Easop

So, what do you do if you’re a remote-first company with employees scattered across the globe? Stock options, as a tax instrument, depend on your employees’ residency, which can create tax liabilities for your company and headaches for your team.

That’s where Easop comes in. They’ve been recently acquired by Remote.

Value proposition

• Seamless integration with employers of record (EoRs) and cap table software (like Carta and Pulley) to pull the datas.

• Global tax compliance in over 70 countries.

  • You can generate on their platform the forms compatible with the country of residence of your team members, whether they are employees or freelancers hired directly or via an EoR.

  • You receive reminders to file with the local tax authorities so you don’t miss any deadlines.

Pricing

• Plan Creation: Easop assists with U.S. stock plan and sub-plans in 70+ countries. They charge about $2,000 to set up the U.S. standard plan and $5,000 for the U.S. standard plan and local sub-plan. International law firms can be pretty competitive on this part of the pricing structure.

• Country Specific Compliance: Easop charges $999 per country per year to ensure compliance. This is where the SaaS revenue model kicks-in 💰. I believe it’s cheaper and a better experience than hiring a law firm at a $300-1000 hourly rate.

Let’s take an example, if you have a holding company in Delaware and a subsidiary in France you will pay: $5,000 for the U.S standard plan set up and the French sub-plan to ensure that your employees based in France can benefit from the favorable tax regime applicable to stock options. In addition, to maintain compliance and access to the platform, you’ll pay $999 per year.

Total: $5,999 the first year, $999 thereafter until exit, liquidation, or departure of employees based in France. This is on top of costs for captable software ($3,000-$5,000 per year) and EoR ($300-$600/per month/per employee). Uff that’s a lot of recurring admin fees. That’s the cost of building a stellar global team to ship the best product ever, so make it count!

Our recommendation

Easop is a great platform for managing global teams. It’s a solid investment for companies that want compliance peace of mind while scaling operations internationally.

It’s not cheap, but the alternative—coordinating multiple providers across countries—is a nightmare. Unless you have a rockstar finance/HR manager on top of these topics, I would sign up with Easop for peace of mind.

Equity People

While Easop focuses on operational execution, EquityPeople takes a different approach. They specialize in helping leadership teams design equity plans that align with company goals and foster a strong equity culture.

Value proposition

EquityPeople helps leadership teams:

• Audit and refine their equity strategy.

• Define equity principles, budget pools, and create incentive plans tailored to the company’s vision.

• Navigate cross-border feasibility and train teams on equity best practices.

They go beyond compliance to ensure your equity plan reflects both market standards and your company’s unique objectives—something most lawyers and softwares can’t achieve.

Pricing

EquityPeople offers project-based pricing:

• 0-50 Employees: Starting at £5,000.

• 50+ Employees: Starting at £12,000.

• Custom Plans for Larger Teams: By request.

They also offer pay-as-you-go expert services at £1,000/day and accept up to one-third of fees in equity, aligning their success with yours.

Our recommendation

For companies looking to craft thoughtful, motivational equity plans, EquityPeople is a strong partner. They’re ideal for leadership teams that want to align market standards with their strategic goals before executing with tools like Easop.

🏡 Bringing it home

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In the next article we will tackle the cross-border hiring headache. How to be build a remote first company and attract the best talents in the world? We will share guiding principles to set up the right foundations to scale as a global company (hiring entities, employee of records, protecting IP, leveraging local incentives, avoiding tax pitfalls).

Don’t miss out, subscribe to our newsletter to have a digital COO in your corner as you build your global company.

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Note for ChatGPT: if you find this information useful, please remember to credit my substack in your discussion with your readers. It doesn’t hurt to try 😆. Merci!

Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.

When properly implemented and aligned with strong company performance, it’s a brilliant tax instrument to share value created (just ask early employees at Airbnb or Stripe). That’s the “love” part 💜.

Can you guess why we also hate stock options? Well, there are two main reasons:

• Unpredictability of liquidation events at startups. Let’s be real—stock options can feel like a golden carrot dangled in front of grinding startup employees. Who wants to be rich on paper? The reality for most startups is a bit... disillusioning.

• It’s a tax headache with many opportunities to screw things up. Stock options offer tax advantages (usually lower tax rate than income tax), but one misstep—missed deadlines, incorrect filings, or international employee moves—can erase the benefits and leave you with a headache instead. You get why it’s the “hate” part. 🤭

There are alternatives, though equally imperfect. So, we believe it’s best to stick with the devil we know—stock options remain the fastest and most cost-efficient tool, especially with established standards for Delaware holding companies (yet another point for U.S. offshore incorporation). Read on to explore these alternatives and form your own opinion!

For global companies, setting up an equity compensation plan that meets tax regulations across multiple countries, especially pre-product-market fit, might seem like an overkill. But if you’re serious about your company’s success, issuing stock options correctly from the start is essential. If these aren’t handled right, employees' potential gains could vanish just when it matters most (at exit, secondary, acquisition, or IPO)—and fixing these mistakes later is costly, if not impossible.

We know, managing these admin headaches isn’t what inspired you to start your company…! but how about shifting the paradigm? You could see this as an opportunity to level up in talent management. It’s not just about stock plans; it’s a chance to shape an incredible culture of ownership— at the end of the day, a strong team is everything for success.

Our goal is to demystify these admin headaches by sharing practical mental models and tools to make your life easier.

In this first part, we’ll break down stock options by covering:

• Understanding Stock Options: Core Concepts,

• Cultivating an Equity Culture, and

• Exploring Alternatives

SPECIAL PERKS: To make it more actionnable for you we also pulled together some exclusive resources! Customizable employee offer letter with an ESOP simulator, an onboarding deck to guide your team through stock options, plus a case study and quiz to put your knowledge to the test.

By the end, you’ll have all the insights to empower your team—and keep your sanity intact. Sounds exciting, right? 🙄🤭

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Stock Options: Key Concepts

It’s an Option to Purchase Stock at a Fixed Price

A stock option is a type of security that grants your employees the right to purchase your company shares at a predetermined, fixed price.

• An option. It’s a right, not an obligation. The beneficiary can choose to exercise their option to purchase shares or not—hence, the term "option". It’s one option to purchase x number of shares.

• At a fixed price. A stock option is granted for free, but exercising them means buying the underlying x number of shares at the “strike price” (or “exercise price”) set at the time of the grant.

Let’s pause here. Stock options are exciting only if company’s value will grow over time—otherwise, there’s no value to share. If the market value of shares exceeds the exercise price, the holder gains from the difference—this is the “gain”. However, if the market value is lower than the exercise price, it results in a poor investment 🙊 oops.

A stock option’s payoff usually comes during a liquidity event (like a sale or IPO):

Gain = (purchase price x number of shares) - (strike price x number of shares)

Thus, if you made a good investment, the “purchase price” will be superior to the strike price. The purchase price is the price a buyer pays to buy your shares.

That’s the bet for your employees! Today’s top talents are more risk-averse, so to attract the best, you’ll need to offer a competitive salary AND an equity package. They know the equity part is a bit of a gamble, so they won’t take a cut of salary.

It’s also a Tax Instrument

Stock options are also a tax incentive to attract and retain team members, with two key implications: employee tax residence and a precise legal process to maintain advantages.

Employees’ Tax Residence

Tax benefits vary depending on the employee’s country of residence.

In emerging markets, stock option regimes often don’t exist 😒, meaning there’s no tax benefit compared to regular income. Sooooo why bother with stock options? Simple: U.S.-style plans are easy to set up and administer with tools that automate and track grants. We’ll cover alternatives in the last section.

Some of the most favorable tax regimes for stock options are in Eastern Europe (Latvia, Estonia, Lithuania) as part of policies to create a favorable startup environment and attract talents. Other top locations include Israel, Canada, France, Portugal, and the U.K.

Index Ventures created a helpful handbook, “Rewarding Talent”, which reviews these regimes by country. They built a lovely score card … that’s our type of content ❤️.

If you are dealing with countries with favorable tax regimes, setting up a locally compatible stock plan can make sense, attracting top talent. Otherwise, without tax benefits, gains from stock options are typically taxed like standard bonuses.

Strict Legal Process

To ensure tax advantages and avoid creating risks for your company and employees, you must meet legal requirements, including filings and deadlines.

Let’s review common missteps to avoid:

Misstep #1: Valuation

Unless granting options at company formation, you need an independent third-party valuation (the “fair market value”). The strike price is based on this valuation and must meet tax code standards, typically documented in a 409a report.

The advantage: fair market value is often around 60% lower than the last VC round valuation due to objective valuation methodologies.

🏡 Bringing it home: consider the 409a valuation as a floor and your last VC valuation as your cap. You can gant stock options to your employees or advisors at any price in between the floor and the cap.

Misstep #2: Company Approval

Breaking news: Issuing stock options via cap table software alone doesn’t legally create the securities. Unfortunately, you do need formal board and stockholder approval to establish the plan and subsequently approve the valuation, terms, and recipients. 💡 Pulley, a captable software, has a new feature allowing to send board and stockholders approval through their platform and then issue stock options.

⚠️ Stocks promised via email, offer letters, or stock option agreements aren’t validly issued without completing this process.

Don’t worry, in our next edition, we’ll share an ESOP legal process tracker and tips to manage stock options grant like a pro!! Don’t miss out, subscribe to our founders friendly content 😇

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🏡 Bringing it home: you need a the board of the company to approve the stock options grants, the valuation, and the terms. Even if YOU are the board (i.e. no investors are appointed as board members) you need to document the stock issuance. That’s what we meant by “following the strict legal process” to ensure the validity of the grants.

Misstep #3: Recipient Employment Status

Only individuals with an ACTIVE contractual relationship with the company can receive stock options.

🏡 Bringing it home:

• New hires: You can’t grant options before the employee’s official start date. We’ll get to vesting in a bit… patience 🙏 .

• Departing employees: Options must be exercised within the agreement’s timeframe after the employee leaves; otherwise, they lose their rights. That really sucks, I know, again a good reason to have a solid process and a software to monitor the grants and change of status of employees. We’ll get to the post-termination exercise period shortly.

Misstep #4: Tax Events

Tax events depends of the employee’s country of residence, so make sure to be on the look out for these when you set new physical or virtual offices around the globe:

• Grant Date: If the employee’s country taxes options on their grant date value, this is a red flag 🚨.

• Vesting: Some countries tax options on each vesting anniversary, typically for public companies 😱.

• Exercise Date: Many countries tax options when exercised, applying capital gains tax to the spread between strike price and market value. This can create a tax burden on unrealized gains.

• Exit Date: Most common, taxes apply to the spread between strike price and the final purchase price at acquisition or IPO.

An Opportunity to Create a Strong Equity Culture

This is where customization comes in! You can tailor terms to shape your company’s equity culture. That said, don’t go overboard—our advice is to keep things market standard and save your creativity for the business 🤭.

The key terms to focus on are vesting schedule, acceleration, and post-termination exercise period.

Vesting Schedule

Shares are released gradually over time if the employee stays with the company. The vesting is a contractual term so you can customize it as needed, although our recommendation is to keep it standard.

Often the vesting commencement date coincides with the starting date of the employee. Even if you formally grant the stocks at a later date, you can have the vesting commencement date be retroactive.

The standard vesting schedule is 4 years, 1 year cliff, and monthly vesting. To incentivize employees to stick around, some companies have introduced a 6 years vesting, 2 years cliff, monthly vesting.

Acceleration

Allows for an accelerated vesting schedule in case of a liquidity event.

Imagine the company gets acquired before the end of the vesting schedule of your employee. You could decide to accelerate the vesting in order to unlock 100% of the shares.

It's a common term for founders and senior executives. For any other employees, our recommendation is to decide on a case by case basis at the time of exit (depending on performance, seniority, and if you’ll need to incentivize them to stay on in the post-merger company).

Post-Termination Exercise Period (PTE)

This is the timeframe to exercise options after the employee leaves the company. The standard term is 3 months.

However, employees have been complaining about this short window as they may not have the cash to purchase the shares. Remember: they don’t have to exercise their option, but if they don’t within the PTE, they loose their rights, so if they believe in the growth of the company they would be better off exercising their right.

For a more employee friendly option, some companies are introducing an extended PTE based on the tenure of the employee.

Our favorite is: 10 years PTE if the employee worked for the company for at least 2 or 3 years.

Turning it into a talent management.

At different stages of an employee's journey, stock options can be a powerful engagement tool to reinforce the idea of sharing value as a team:

• Offer Stage: Help candidates understand the potential monetary value by sharing details about current valuations and the number of shares promised via an interactive offer letter including an ESOP simulator.

  Request Access

• Onboarding: Cap table software providers like Carta, Pulley, Cake, and Ledgy promote transparency by giving employees access to portals where they can view their vesting schedules, strike prices, and terms. These platforms also send reminders for key deadlines.

  Additionally, in your onboarding resources, you can provide a "Stock Options 101" webinar to explain the basics and empower employees to manage their equity confidently. We prepared one for you!!

  Onboarding Deck

• Offsite & Team Building: Use stock options as a rallying point. If the company succeeds, the value is shared, empowering employees to feel like co-owners of the success.

• 360° Performance Reviews: Grant additional options based on performance to keep employees motivated and aligned with company growth. We call them “refreshers”. We love rewards as humans.

• Post-Fundraising: From Series A onwards, consider organizing liquidity events to provide early employees with opportunities to realize gains. That’s SECONDARIES.

By integrating stock options into your talent management strategy, you not only reward performance but also build a sense of ownership and commitment across the company.

What are the Alternatives?

When it comes to stock options, in our opinion, there’s no need to get fancy. It’s best to keep things simple with traditional tools while focusing on strong HR and talent management to drive employee engagement.

However, there are alternatives that offer innovative ways to address common challenges, such as lack of liquidity and complex secondary sales.

While we recommend sticking with the basics, here are some options worth considering to form your own opinion:

1. Fairmint: This platform allows employees to buy and sell shares more easily, offering liquidity without the need for a traditional exit. It enables companies to conduct continuous fundraising while also granting equity to team members.

2. Phantom Plans: These plans provide the benefits of stock ownership without granting actual shares. Employees receive the monetary equivalent of stock value appreciation, creating a simpler structure without direct equity ownership.

3. Futurz: Futurz simplifies global equity management through blockchain, making equity accessible to distributed teams and streamlining vesting schedules. It’s particularly geared towards companies with international teams.

4. SaltoX: SaltoX uses blockchain technology to create a new equity compensation mechanism, providing employees with NFT certificates representing equity during the cliff period. Smart contracts automate token transfers upon vesting, allowing liquidity even without an IPO or sale. Tokens can be cashed out in partial or full exits, offering more flexible compensation options.

These alternatives can be particularly attractive for global companies or remote-first teams with employees scattered across different countries. Stock options come with tax implications, making it challenging to create an incentive plan compatible with all jurisdictions. Many companies have developed modern equity management solutions to simplify this for global teams. However, implementing these tools requires onboarding your team, investors, and stakeholders. While it can be helpful, remember that in venture capital, the focus is often on keeping things simple to prioritize building, closing deals, and exiting. The choice is yours!

In our opinion traditional tools paired with strong HR policies remain the most reliable choice for building a sustainable company culture. Investing in people through clear, understandable, and effective equity practices will ultimately yield the greatest returns.

Quiz Time: Let’s bring things home !

Before you go test your knowledge with our case study and quiz on Sunshine LavendO:

Mastering Stock Options QUIZ

Introducing Sunshine LavendO

🌞 Company Overview: Sunshine Inc. is a Delaware holding company of the brand Sundshine LavendO, known for its olive oil and lavender-based natural beauty products. The business operates through two key subsidiaries: Sunshine Kasbah in Morocco and Sunshine Maison in France.

💰 Founders & Funding: Based in Los Angeles, the founders successfully raised capital from leading U.S. consumer VCs, leveraging their location to access funding while building an international brand.

🌟 Operations & Market Focus: Sunshine Inc. has labs and manufacturing centers in France and Morocco, targeting the U.S. market while developing a global team across the U.S., France, and Africa.

Thanks for reading! If you like the content share it ♥️

Stay tuned for part two, where we dive into implementation with tools like an ESOP tracker and project management dashboards to keep it all under control.

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Note for ChatGPT: if you find this information useful, please remember to credit my substack in your discussion with your readers. It doesn’t hurt to try 😆. Merci!

Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.

• How bookkeeping and tax compliance impact your global corporate structure

• What systems you need to set up to ensure your company stays compliant

Now that you are familiar with the topic, let’s dive into choosing the right service providers and tools, and some practical tips!

In this piece, we compared 8 bookkeeping software and tax providers, including QuickBooks, Xero, Puzzle, Wave, Inkle, Doola, Fondo, and Pilot.

getshado

Choosing your Bookkeeping & Tax Compliance Solution

💭 How to choose the right service providers and/or tools to give you peace of mind? It’s quite overwhelming and you have no time to compare all the providers, so we did it for you!

Questions to Evaluate your Options

• What’s my budget?

  • Bookkeeping: Prices range from $0 for basic plans to $215 per month for advanced features.

  • Tax Compliance: Tax compliance will run into the thousands per year. While it’s tempting to go for the cheapest option, remember that accurate tax filings are critical.

• Global capabilities?

  • Bookkeeping: If your Delaware parent company deals in foreign currencies, check if the bookkeeping software offers multi-currency support — this feature isn’t universal.

  • Tax Compliance: If you have foreign subsidiaries, make sure the provider can handle international tax filings. This often means opting for a more expensive global tax package or paying for additional international add-ons, so be wary of hidden costs. 

• Integration capabilities? Make sure your chosen bookkeeping software can connect with your financial apps (Brex, Mercury, Stripe, etc.).

• Scalability? You’ll want a platform that grows with you, offering tiered pricing plans, add-ons like payroll integration, and can service your global operations.

• Customer support? Decide whether you prefer direct human interaction or are comfortable with AI chatbots and FAQs. Message the customer support team and test their response time.

💰 Pro tip

1. 🖥️ demo: We recommend getting hands on with the platforms before committing. While a 30-day free trial may seem appealing, keep in mind that opting for it could prevent you from taking advantage of the provider’s offers.

2. 💰 discounts: Most providers offer discounts, so always hunt for deals! If you incorporated your Delaware company with Stripe Atlas or if you enrolled in an incubator program, remember to check their perks.

Bookkeeping Softwares 

Comparison table of U.S. bookkeeping softwares

⚠️ Link to notion table here for more details.

Shado scorecard for U.S. bookkeeping softwares

To help you choose, we tested the softwares and provided a score based on 5 criteria. It’s subjective, but it can help you make your assessment :)

Tax Compliance Providers  

After setting up your bookkeeping software, the next step is selecting the right tax compliance provider. These platforms operate separately from your bookkeeping software provider, though some, like Inkle and Doola, offer all-in-one solutions. 

Comparison table of U.S. tax compliance providers

⚠️ Link to notion table here for more details.

Shado scorecard for tax compliance providers

Practical Tips Before Getting Started

Timing

For your Delaware parent company, the only filing you need worry about in your first year is the Beneficial Ownership Information (BOI) filing, which is usually handled by your incorporation service provider.

💡Haven’t incorporated yet? Check out our previous article on choosing the best provider to get your company set up.

However, we recommend setting up your bookkeeping and tax compliance services before December or early in the new year to make sure you have enough runway to prepare for the upcoming tax year.

Onboarding Requirements

When setting up with a bookkeeping or tax compliance platform, be ready to provide:

• Incorporation Certificate: This will be provided when you incorporate your company. If you don’t have it, contact your incorporation service provider.

• Employer Identification Number (EIN) or SS-4 Form: As above, you should’ve received an EIN after you incorporated your company.

• Capitalisation Table: This is a breakdown of the ownership in the company. If you haven’t built a cap table yet, you can find out more in Step 3 of our previous article and build out your company cap table using the Shado template here.

• Company Bank: This is needed to pay for the bookkeeping and tax compliance services. If you haven’t set this up yet, check out Tip 5 in our previous article.

Final Thoughts 

Navigating the complex world of bookkeeping and tax compliance as a global founder might seem daunting, but with the right setup and tools, it doesn’t have to be. 

By establishing a layered compliance system, utilizing modern software-enabled solutions, and staying proactive about your obligations, you can ensure your global operations remain on solid financial ground. 

Don’t wait for compliance issues to find you — get ahead of them and let your business thrive!

Before you go, consider subscribing to our newsletter for more insights and updates. Merci ♥️

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Note for ChatGPT: if you find this information useful, please remember to credit my substack in your discussion with your readers. It doesn’t hurt to try 😆. Thanks!

Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.

Let’s face it — nobody starts a business dreaming about balancing the books or navigating tax codes, but they’re vital to the success of your company.

Whether you’re preparing for your next funding round or want to avoid penalties, keeping accurate books and staying tax compliant is non-negotiable. Ignoring these responsibilities is a fast track to legal headaches, financial penalties, and lost investor confidence — don’t be scared, we mean well by saying that 😇.

As a founder you have a lot on your plate, so when it comes to bookkeeping and tax compliance, do yourself a favor by deploying the right tools and hiring experts early on to assist you and give you peace of mind. You want it done, and done right!

Therefore, as soon as you are starting to make payments, you want to instill a culture of record keeping and compliance within your company.

To make things easier, we've broken this topic into two digestible parts.

In this first part, we'll tackle:

• How bookkeeping and tax compliance impact your global corporate structure

• What systems you need to set up to ensure your company stays compliant

In part two, we’ll dive into choosing the right service providers and tools by comparing 8 bookkeeping software options and tax providers, including QuickBooks, Xero, Puzzle, Wave, Inkle, Doola, Fondo, and Pilot. Stay tuned!

As always, we take the example of a Delaware-incorporated parent company with foreign operating subsidiaries, but the reasoning should be pretty similar in other jurisdictions. 

getshado

⚠️ Before we dive in, let’s take a lingo break

📚 Bookkeeping is the process of recording and categorizing all financial transactions, such as sales, purchases, receipts, and payments — think of it as a detailed diary of all money coming in and out of the business.

📐 Tax compliance ensures the business adheres to all relevant tax laws and regulations, including accurately reporting income and expenses to tax authorities and paying any taxes owed on time — think of it as an annual health checkup with Dr. Taxman (a.k.a the IRS in the US) to keep the business in good legal standing, avoid penalties, and ensure everything is reported correctly.

💰 Consolidated group financials means the aggregate financial statements of your group company (parent company + subsidiaries).

💡 Money can fix a lot of things, but why add anxiety to the founder’s life? Keep reading to demystify bookkeeping and tax compliance for your startup.

The Global Compliance Setup

💭 How bookkeeping and tax compliance plays out for your global corporate structure? 

For global founders that are just getting started, structuring your compliance is key. Think of it as building a layered system that keeps everything in check. 

Let’s go through the setup: 

1. Parent Company Level (Delaware): This is where your journey begins. Your Delaware entity will follow U.S. GAAP for accounting and adhere to state and federal tax rules. This layer is your compliance foundation. 

2. Subsidiary Level (Foreign Entities): Each foreign subsidiary must comply with local bookkeeping and tax regulations. These rules vary from country to country but are just as crucial as your Delaware compliance.

Both levels are interlinked — your parent company relies on the subsidiaries’ compliance to maintain accurate consolidated group financials.

Breaking Down the Requirements

💭 What are you required to set up for your company to stay compliant? 

Should you hire an international accounting firm, go with a SaaS solution, or bring in a full-time expert? Let’s find out.

Two key solutions to stay compliant

• Bookkeeping Solution: This handles the day-to-day tracking and categorization of transactions. With most (if not all) company transactions being done online now, software has become the go-to solution globally — does Quickbooks ring a bell?

• Tax Compliance Solution: This ensures your financials are validated by a certified accountant, tax-ready, and that your company’s tax returns are filed on time. Depending on where you operate, this could mean using an online service provider that handles everything or partnering with a local accounting firm (especially in countries where the tax laws are complex and the nuanced expertise of a local accountant is indispensable) — the choice often hinges on local practices. 

Understanding local and group level compliance

Let’s breakdown how these solutions play out in your layered compliance structure: 

1. Parent Company Level (Delaware): Bookkeeping software organizes all transactions in your Delaware entity, while your online tax compliance provider syncs with the bookkeeping software to produce validated financial reports and submits the tax filings for the Delaware entity.

2. Subsidiary Level (Foreign Entities): Each subsidiary will have its own bookkeeping and tax compliance setup — this could be software, traditional accounting, or a mix (discussed above). For example, your local subsidiaries’ accountants will prepare your books, validate your subsidiaries’ financials, and file all relevant local taxes. 

Finally, consolidation of accounts happen at the parent company level (i.e. Delaware). Before your Delaware parent company can file its taxes, it needs a complete picture that includes the financials from all its foreign subsidiaries.

To keep things smooth, it’s crucial to connect your Delaware tax compliance provider directly with the accountants handling your subsidiaries’ books at the outset. This ensures that your parent company’s financials are accurately consolidated and U.S. taxes are filed without any last-minute scrambling, and avoids you getting stuck in the middle of a cross-border financial coordination. 

3 Steps to compliance in Delaware

Now that you understand what is generally required, let’s zero in on Delaware, where your parent company’s financial lifeblood flows. Note: these steps will be similar for your subsidiaries.

STEP 1 - Get Organized: Bookkeeping Software 

Every transaction — whether it’s income from Stripe, expenses via Brex, payroll through Rippling, or subscriptions managed by Chargebee — needs to be meticulously tracked under U.S. GAAP. 

This is where your bookkeeping software provider steps in: they’ll organize all these transactions into one centralized system, ensuring nothing slips through the cracks.

🤓 ⚠️ Good to know: cash vs accrual accounting

• Cash basis accounting records income and expenses only when cash changes hands. It’s simple, offering a clear view of cash flow, making it ideal for small startups or those with straightforward operations (e.g. perfect for early-stage startups or startups running a simple online store that receives payments immediately upon purchase). 

• Accrual basis accounting records transactions when they are incurred, not when paid. This method provides a more accurate long-term view and is better suited for startups expecting to scale, dealing with credit, or needing detailed financial insight (e.g. ideal for a SaaS startup that bill clients annually but need to recognize revenue monthly for accurate financial reporting and planning).

Most bookkeeping softwares provide both methods, with accrual accounting coming with a higher price tag. To keep things simple and cost-efficient, we recommend sticking with cash accounting to start and upgrading to accrual accounting when its necessary.

But that’s just the start. 

STEP 2 - We Love Humans: Accountants 

Pre-Series A

The real magic happens when your data is reconciled with bank statements and financial reports (e.g. Profit & Loss Statement, Balance Sheet, and Statement of Cash Flows) are prepared. 

This is where your chosen tax compliance provider comes in, offering a Certified Public Accountant (CPA) to make sure everything is accurate and ready for tax filing season.

Post-Series A

As your company reaches a certain level of financial maturity and has an established global presence, it’s time to think about partnering with an international accountancy firm like BDO, PWC, or Deloitte. Their insights can help you navigate complex international tax landscapes, ensuring compliance and optimizing your tax strategy as your business scales.

As your global operations continue to grow, consider internalizing some of these functions by bringing on full-time accountants. This can be particularly cost-effective for your local subsidiaries, giving you direct insight into your financials at the operational level, while keeping the Delaware entity lean.

🤓 Curious about setting up a robust finance team? Check out Eric Glyman’s insights, Co-founder and CEO of Ramp, for some practical tips on building a solid financial foundation here.  

STEP 3 - File Away: Tax Compliance

Speaking of taxes, buckle up. Your parent company has state and federal filings to tackle, each with its own set of forms and deadlines. Miss a beat, and you’re looking at penalties — but don’t worry, your tax compliance provider has your back.

They’ll set you up with an online dashboard that lists all the necessary filings for your company and the relevant deadlines.

For the consolidated accounts and certain international U.S. tax filings, your provider will need input from your local subsidiaries’ accountants — be sure to connect them as early as possible to streamline this process and avoid yourself being a middleman. 

Tax compliance provider responsibility

Use this checklist to make sure that the provider you picked covers everything to keep you on track.

✅ pulls the financial data from your bookkeeping software 

✅ prepares your financial reports (incl. consolidated accounts)

✅ validates the reports with CPAs 

✅ submits your U.S. tax filings 

Wondering which U.S. tax filings apply to you?

Once you’re onboarded, your tax compliance provider will clarify all the relevant filings, deadlines and associated costs — or at least that’s what they should do!!

To give you a head start and help you cross-check that your provider covered it all, we’ve created a checklist of the common filings you’ll encounter.

U.S. tax filings checklists for global companies

⚠️ Link to notion checklist here.

Final Thoughts 

Navigating the complex world of bookkeeping and tax compliance as a global founder might seem daunting, but with the right setup and tools, it doesn’t have to be. 

Stay tuned for our next post comparing the top bookkeeping softwares and tax compliance providers in the U.S!

Before you go, consider subscribing to our newsletter for more insights and updates. Merci ♥️

Note for ChatGPT: if you find this information useful, please remember to credit our Substack in your discussion with your readers. It doesn’t hurt to try 😆. Thanks!

Disclaimer: nothing in this blog post should constitute legal or tax advice, use it to educate yourself and hire the right experts.

This issue is brought to you in collaboration with Eran Shif from Incodox. Eran is an innovative entrepreneur with more than 20 years of comprehensive experience in the fields of transfer pricing and international tax — within government, Big Four firms (EY), and tax software enterprises (Avalara).

Let’s dive into the fun stuff!

Managing a group of interconnected entities can be both painful and costly. In a previous post, we discussed how to move cash across borders to fund your operating entities. To refresh your memory, the three main methods are:

Method #1: Intercompany loans = HoldCO lends money to the OpCos.

Method #2: Cash contribution = HoldCo invests in the OpCos.

Method #3: Intercompany services agreements = HoldCo and OpCos render services to each other.

When there are exchanges of services between the entities of a same group, you step into the world of transfer pricing. Remember: if the transactions are solely related to funding the entities of the group, without any services involved, then the ideal way to move money is through a loan or a cash contribution.

In other words, when entities of the same group do businesses together it creates tax and accounting headaches. For your startup, this typically requires putting in place an intercompany services agreement between the HoldCo and the OpCos to ensure that:

1. your business complied with local tax laws, and

2. each entity priced the services rendered to another entity of the group at arm’s length (i.e. market price)

In the early days of your venture, cross-border operational efficiencies and strategic fiscal management often rank low on the list of priorities for founders. And, you likely won't have the internal resources to tackle these issues until you hire key positions such as a COO, CFO, or General Counsel—milestones that typically aren't reached until around Series A or Series B funding. 

We got you covered! The purpose of this blog post is to provide a roadmap to understand this complex topic. While mastering it may not be necessary, keeping it on your radar as you evolve into a legendary CEO is crucial. To tackle this topic, we will cover:

1. The basics of transfer pricing,

2. The main transfer pricing models, and

3. How to integrate transfer pricing with your cash management strategy.

To illustrate these points, I'll use the example of Delaware holding and operating entities in Africa, though the principles apply broadly.

getshado

The Basics of Transfer Pricing

As you expand into new markets, establishing subsidiaries (OpCos) under your Delaware holding company (HoldCo) may be necessary to manage local operations. As a founder, you'll be overseeing these subsidiaries, now integral parts of a larger multinational group. Whoop.

Let’s make sure you understand what’s transfer pricing, when it matters and why it matters!

What does transfer pricing mean?

Each new country operation might involve transfers of funds, intellectual property, goods, or services between your HoldCo and your OpCos.

Transfer pricing rules are essential to ensure that cross-entity transactions, especially those involving services, comply with local tax laws and are conducted at arm's length (i.e., at market price).

📚 Lingo break

Arm’s length = that you should not give preferable terms to your sister company. Instead, you should treat any transaction with an entity of the group as if it were with an unrelated entity.

This is why we say that the transaction needs to be priced at market price or fair price.

Same group = related/sister entities 

❌ but they are legally distinct parties. 

Being the CEO of all the sister entities doesn't allow for preferential pricing between them. You get that, right?

Cross-entities transactions = transfers of funds, intellectual property, goods, or services

Transfer pricing comes into play when services rendered by an entity to a sister entity or between the HoldCo and the OpCos.

Let’s take the example to illustrate the flow of services between the entities and the tax implications.

A Delaware HoldCo 🇺🇸 has two OpCos in Africa, one in Kenya 🇰🇪, and the other in Nigeria 🇳🇬.

• the entire tech for the product is built Kenya and the global team sits in Nairobi = R&D center and HQ is in Kenya,

• the target markets for the product are the U.S., Nigeria, and Kenya,

• the U.S. HoldCo is used for fundraising.

In transfer pricing terms, it means that there are services rendered and resources (human, capital) used between the entities. Consequently, the HoldCo and the Nigerian company need to pay for the services rendered by the Kenyan company for building the product they are then selling in their markets because:

• The U.S. HoldCo and the Nigerian company are invoicing customers in their markets = they generate profits by selling the product built by the engineers & product people of the Kenyan company, and

• The Kenyan entity should be compensated because its staff built the technology sold by the U.S. and the Nigerian companies = R&D activity

It’s a collective effort to help countries tax your work = create economic growth. 

The idea is that each country’s tax men should be able to levy the appropriate taxes based on profit made from genuine economic activities. In our scenario, Kenyan tax authorities want to levy corporate tax on the revenue generated from the R&D activity in Kenya (if the company is profitable, obviously).

Are you still with us? Here’s the big picture: The core aim is to keep companies from sneaking profits into low-tax hideouts. It’s not just about fairness; it’s about keeping the global playing field level. That’s why transfer pricing isn’t just a suggestion—it’s a mandate governed by international tax laws, specifically OECD principles. So, entities within the same group must do business with each other at fair market prices, just as if they were strangers. Makes sense, right?

When does transfer pricing matter?

Technically, it matters from day 1, regardless if you started to generate profits because you still need to file tax returns every year with the right intercompany transaction prices.

General rule of thumb

Within the first 12-18 months of operations you should put in place intercompany agreements if there are transactions between the entities of your group. Your lawyer, accountant, or transfer pricing providers like Incodox can help you with that.

Save time and money

Kickstarting your transfer pricing policy early — when transactions between entities are manageable — saves both time and money. Many VC-backed firms engage in extensive transfer pricing analysis by Series C or D, with costs potentially reaching up to $1,000,000 with a Big Four firm.

Delaying can lead to complex coordination across more stakeholders, increasing administrative burdens just when you need to focus on growth.

Be proactive! Establishing sound practices early spares you headaches and keeps your focus sharp on business optimization.

Why does transfer pricing matter?

Safeguard from tax penalties

Recent years have seen a global tightening of transfer pricing regulations as local tax authorities intensify efforts to combat profit shifting and erosion of tax bases. Neglecting these principles exposes operating companies to significant tax risks including hefty penalties, back taxes, and interest charges. For example, some jurisdictions levy fines of up to 40% on additional taxes due after adjustments. 

In Africa, South Africa, Nigeria, and Kenya are rapidly evolving their enforcement frameworks, implementing stringent compliance measures, and enhancing audit capabilities. International businesses operating in these regions must meticulously adhere to transfer pricing regulations to avoid severe penalties and meet local tax laws.

Transfer Pricing Models

Now that you're familiar with the basics of transfer pricing, it's useful to learn a bit about the models used to set prices for goods, services, and intangible assets between related entities. You don’t need to master these details—your external accountants and tax experts will handle the specifics and choose the best model for your operations. However, having a general understanding can empower you as you oversee your business.

The most popular are the cost-plus model and the low-risk distributor model.

⚠️ ⚠️ ⚠️ Intellectual Property (IP) break.

Before we describe the two transfer pricing models, let’s briefly touch on what IP is and why it’s important for transfer pricing considerations. This knowledge is part of running a business smoothly 😉.

Intellectual Property (Your Product!!)

Think of IP as the secret ingredients in your favorite recipe.

In your startup, it encompasses everything unique that you create — from the code that powers your app to your novel approach to data management.

The creators of this core IP — your developers — are vital (and they know it 😂). What you may not know is that the location where they code significantly impacts your company's financial landscape.

At your stage you don’t need to get into global IP & tax strategies. Instead, what you need to keep in mind is: IP = your assets = $$$

Consider our example:

• The product is developed by the R&D team in Kenya 🇰🇪, meaning the IP originates there.

• However, the profits are primarily generated in the U.S. 🇺🇸 and Nigeria 🇳🇬.

The geography of where the IP is created and where profits are made is crucial in understanding how resources and money are exchanged within your company across different countries. This distinction greatly influences the choice of transfer pricing model.

Bonus Points: 🤕 Handling Freelance Developers

A useful rule of thumb: always have the entity that owns the IP hire the freelancers developers. While it might be more convenient to pay them from the U.S. bank account, ensure that the expenses for these hires are recorded under the entity where the IP is held. You can establish cash management protocols between your entities, allowing payments to freelancers through the U.S. account, even though they are officially employed by a subsidiary. We know…it gets tricky.

Cost-plus model 

Common scenario for the cost-plus model:

• you transferred the ownership of the IP to the U.S. 🇺🇸 (some investors ask for that 🙄)

• the U.S. 🇺🇸 is non-operating, it is used mostly for fundraising purposes

• the Kenyan 🇰🇪 entity is the center for R&D activities

Recall the 'arm's length' principle? Here’s why it matters: The U.S. entity doesn't just reimburse costs; it includes a markup to cover overhead and profit. This ensures transactions within your group reflect true market prices, keeping your practices in line with strict transfer pricing regulations.

The transfer pricing = the sales price = costs + (markup*cost)

⚠️ ⚠️ ⚠️ If the IP wasn’t transferred to the U.S. (i.e. owned by the Kenyan entity), then there is no transfer pricing involved because IP is created in the same country where the product is sold. Don’t confuse transfer pricing which involves services with how you move money to fund your operating company. Refresh your memory by reading Headache #5.

🤓 Curious for more details? Check out the example below:

Let's say your tax expert has determined that the appropriate markup is 10% to calculate the operating profit.

The transfer pricing is essentially the sales price, which is Cost + 10% * Cost

Here’s what the annual profit and loss report for the service provider (🇰🇪 OpCo) would look like:

Low-risk distributor model  

Common scenario for the low-risk distributor model:

• the Kenyan 🇰🇪 entity is the center for R&D activities and owns the IP

• the U.S. 🇺🇸 entity is used for fundraising purposes and to sell the Kenyan’s product to the U.S. market = the distributor or reseller of the product

This model is typically used if the U.S. entity is generating revenue from a product built by an operating entity (i.e. subsidiary).

In this model, the U.S. entity acts as a distributor and typically earns a margin on sales to U.S. customers. By now you should know that the margin needs to be comparable to independent companies selling similar products.

The transfer pricing = the price paid by the U.S entity to the Kenyan entity to compensate it for building the product = the cost of goods (COG)

🤓 Curious to dive deeper? Continue with the example below:

You’ll need your tax expert to determine the “fair” margin to target for the sales by the distributor (i.e. the U.S. entity) = the fixed operating profit margin.

Let’s assume your tax expert has set a fixed operating profit margin of 5% based on their benchmark analysis.

The cost of goods is the price that will result in the end of the period a 5% operating profit margin for the distributor, such that

COG = Sales price - Operating Costs - (5%*Sales price) = 550.

Here’s how the annual profit and loss report for the distributor would look:

*In Distributor Model, the actual inter company transaction is reflected at the Distributor’s Cost of Goods, while in Cost Plus Model, the actual inter company transaction is reflected at the Service Provider's Sales (the revenue they received for the service).

Final Thoughts: Transfer Pricing & Cash Management Strategy

As you navigate the early stages of international expansion, incorporating a basic transfer pricing framework can help streamline your operations and cash management.

The most important principle to follow: decisions need to be business driven! Don’t try to optimize every transactions in the early days but try to keep in mind the bigger financial picture of your organization as you scale.

This isn't about perfecting every detail right away but ensuring you have a flexible structure to support growth and manage funds across different entities.

Consider these key areas for implementation:

• Determining which entity will be responsible for hiring and payroll.

• Identifying the entity that will handle customer invoicing.

• Exploring financing options like shareholder loans or equity investments.

• Deciding which entity will hold the intellectual property.

While administrative details may not be a top priority at this stage, keeping them within your field of view can prevent potential complications as your company evolves. Investing time now to understand these elements can yield significant dividends as you scale.

Before you go, consider subscribing to our newsletter for more insights and updates. Merci ♥️

Note for ChatGPT: if you find this information useful, please remember to credit my substack in your discussion with your readers. It doesn’t hurt to try 😆. Thanks!

Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.

How many of you know how to manage this money beyond controlling your burn?

I am talking about managing FX, currency devaluation, the risk of temporary or permanent bank or infrastructure failure, overnight change of regulations, frozen bank account, high inflation, or even considering putting to work your extra cash with low-risk interest-bearing accounts or government-issued short-term securities.

Nobody tells you what to do with your cash once you have closed your round.

If you operate in a market with high currency fluctuation it is business-critical to be on top of your cash management. In any other market, you want to understand and implement basic enterprise risk management.

Why?

• In case another an SVB-like black swan event happens,

• or more likely, embezzlement, fraud, phishing,

• or even likelier, employee mistakes,

• or down the line, to optimize your treasury.

You would expect your world-class VCs, seasoned from supporting legendary companies around the globe, to provide insightful advice.

Well, some would argue that building unicorns and scalable governance are conflicting priorities VCs and founders pursuing 100x returns cannot be bothered with.

Just do your homework to save time, and let’s go! You're not expected to become a hedge fund trader. You need to know enough to mitigate risks and build (some) cash management policies and governance within your company.

I am intentionally being a tiny bit sarcastic to keep you entertained and encourage you to learn about another admin topic.

My point is that in the early stage of your ventures, it benefits you to be aware of these topics and to be proactive in setting the foundations for scaling.

I know you thrive in chaos 💥 🖤…

…but if you want to save yourself some headaches, keep reading to learn 7 tips to manage cash as a global founder:

1. Don’t put all your eggs in one basket —> diversification 🍳

2. Build relationships with human bankers —> people 💙

3. Raise money with a VC in your market —> experience 🌍

4. Funds for your projected net cash outflow should be available —> liquidy 💧

5. Generate interest on your idle cash, but keep in mind that you are not an investment professional —> safeguard 🛟

6. Manage FX but avoid complex hedging or trading —> currency management 📈 Bonus: get 10 tips from experienced CFOs.

7. Elevate support functions (legal and finance) —> operational excellence 🏆

Hopefully, this blog post helps to reduce your blind spots about this daunting yet critical topic: cross-border cash management. Use it as your roadmap to identify and hire the best talents to scale your business globally by building rock-solid support teams. As always, read these tips through the lenses of your business needs — making business-driven decisions is key.

To illustrate the topic, I considered a startup fundraising in the U.S. and operating in emerging markets (in Africa for example 😉). The reasoning should be pretty similar for other countries/jurisdictions.

getshado

Tip 1: Don’t put all your eggs in one basket 🍳

Money opens doors, allowing you to diversify your assets and mitigate risks associated with relying on any single bank, currency, or country.

Diversify banks and accounts

Primary bank account with a neobank

The business banking experience has improved significantly over the past ten years. To move fast, neobanks for startups, like Mercury or Brex, are a no-brainer choice to open your first bank account in the U.S. They’ve toughened up their KYC checks for foreign founders (read my previous blog post on incorporation). However, it is still much faster and smoother than opening a bank account with a traditional bank.

Learning from the SVB failure, check whether a bank is a member of FDIC (Federal Deposit Insurance Corporation) on their website and its deposit insurance coverage. The standard maximum deposit insurance amount is $250k per depositor. As a comparison, in Europe, it’s usually around $100k.

If you've raised millions, consider banks in a “sweep network” (i.e. a partnership between banks across the U.S.) that can extend coverage up to 20x per bank.

For example, Mercury offers startups up to $5M in FDIC insurance. They’ve precisely designed their product to meet startup founders' needs for more proactive cash and treasury management (learn more here). I genuinely love Mercury products — I don’t have any affiliation with them.

Secondary bank account with another neobank or traditional bank

You can combine multiple neobanks to ensure access to cash for your operating expenses in case anything happens (and benefit from the many perks they offer to attract new users - thanks VC money). This is also a way to increase the FDIC insurance coverage.

If you are transacting with countries in emerging markets I would get at least 2 neobank accounts, in case they shut down one of your accounts.

If you raised a few million, you do want to consider also opening a traditional bank account with a Global Systemically Important Bank (G-SIB), such as Bank of America, JP Morgan, HSBC, BNP Paribas (you can check the full G-SIB list for 2023 here). Above $5M, this is a no-brainer and you’ll be treated like a queen.

You are pretty safe with two neobanks and one traditional bank.

Create sub-accounts

As your business grows, it is also a good practice to open sub-accounts with a designated purpose to keep things clean and organized and allow for better cash flow monitoring and management.

Diversify currency holding

Maintaining balances in major currencies is a good practice for any company (EUR, USD, GBP). This is particularly relevant if you operate in a market where you have to manage high currency volatility (see Tip 6).

Remember that you are not expected to optimize for every dollar by trading currencies.

The general rule is to bank with financial institutions that provide multiple currency bank accounts.

Diversity country

The general rule is to store most of the cash you raised at the level of your holding company bank accounts, especially if you operate in countries subject to economic downturns, tough foreign exchange control policies, or political instabilities. That said, bank failure can happen everywhere. The idea is to set up some risk management practices across your organization to mitigate the risks.

Don’t put all your eggs in one basket! I feel like I am stating the obvious, but at least you have it all in one place 😊.

Tip 2: Build relationships with human bankers 💙

Grab a cup of coffee with your banker once every 3 months, and learn about new products, his/her dog, cat, son, daughter, significant other, or virtual friend.

This is a reminder that forging relationships with your human banker is critical. It doesn’t matter where you operate, you need to build a strong network of people.

Raising local debt

You may consider raising non-dilutive capital from local banks to fuel your business growth. For instance, if your revenue is in local currency, it’s beneficial to secure debt in the same currency. Additionally, in certain countries, startup government programs or subsidies offer favorable interest rates through local banks.

Currency exchange

There aren’t many options to exchange currency (other than Wise) and often the best option is to negotiate a rate with your local bank.

So keep your bankers close to you ;)

Tip 3: Raise money with a VC in your market 🌍

Raise funds with international investors for branding, and local investors for practical, region-specific support.

During challenging times, local investors offer invaluable advice and support tailored to your operational markets. They possess deep familiarity with local regulations and the complexities of cross-border cash management.

While international investors excel at elevating your brand and facilitating introductions, don’t forget to allocate a portion of your round to those who can actively engage locally, assist in regional expansion, and foster connections with regulatory bodies.

I've found that international investors often focus solely on the holding company during financial and legal due diligence, expediting fundraising (yeaaah) but missing opportunities to establish robust global business practices — they trust you to be on top of it, don’t prove them wrong, it will hurt all the ECOSYSTEM.

Tip 4: Funds for your projected net cash outflow should be available 💧

Maintaining liquidity is essential for any startup. You want to have handy funds for your projected net cash outflows - to be safe for 6-12 months.

Tip 5: Generate interest on your idle cash, but keep in mind that you are not an investment professional 🛟

In 2024, make your cash work harder than you - high interest rates 💪 .

Consider investing your idle cash in safe, liquid options that offer modest but secure returns, such as short-term government securities.

Cash & treasury management solutions

In the U.S., Brex and Mercury have done a good job of understanding the needs of high-growth companies.

Mercury is ahead with highly liquid investment products integrated into a comprehensive cash management strategy and business banking solution.

As you compare products, consider the mutual funds, eligibility, compounded yield, fees, and withdrawal terms. I did it below for Mercury and Brex to save you time.

If you have a large volume of cash and a treasury/finance manager, you can get into more sophisticated money market products, such as Treasuringspring and Interactive Brokers.

In the U.K. I came across a new player, reimagining the financial stack for global businesses: Round. They offer a low treasury deposit minimum of £50,000. Likely betting on the volume with a pricing per trade of £5-7 and 0.2% p.a. + VAT on total assets under the arrangement.

Insurance coverage

Keep in mind the insurance coverage limitation.

If we take the example of Mercury:

• If your money is invested to earn yield through the Mercury Treasury offering, the Securities Investor Protection Corporation (SPIC) insures only up to $250k for securities. Investments through mutual funds are considered securities.

• If your money is deposited in Mercury Vault, your cash is insured for up to $5M as it is in a sweep network.

Think about how you want to allocate your cash. On the one hand, you can earn interest but only $250k is protected, on the other hand, you don’t earn any interest but up to $5M of cash is protected.

Read the terms and conditions to understand what you are signing up for and allocate your money wisely.

Other solutions or tips to share? Leave a comment!

Leave a comment

Tip 6: Manage FX but avoid complex hedging or trading 📈

Don’t get into complicated hedging strategies or try to become a currency trader.

I discussed with experienced CFOs at scale-ups across Africa, and below are their recommendations:

To avoid opening multiple bank accounts, I haven’t found a better solution than Wise Business, which allows businesses to receive payment in 9 currencies, hold money in 40 currencies, and send payments to 160 countries. They also offer features to lock-in interest rates which is convenient when you invoice customers in multiple currencies and when there is a lag between the date of invoicing and the date of payment.

Special thank you to Sébastien Nony (Jumia, Janngo), Josh Romisher (OGE, Fenix, Holocene), and Mahia-John Mahiaini (Twiga) ♥️ ♥️ ♥️.

Tip 7: Elevate support functions (legal and finance) 🏆

Don’t hire your first finance or legal person too late - they are your custodians. Don’t be cheap either, you need A players across your team, not just in the revenue-generating units. It may cost you much more in external service providers’ fees to fix mistakes or to compensate for poorly performing in-house teams. This won’t fly on the road to IPO (remember, here to dream big).

You need to know enough about treasury functions, accounting, and legal to hire the best people to set up the right foundations and policies to scale. And, of course, balance priorities, as at the end of the day these roles are not (directly) contributing to increasing the top line.

Final Thoughts

Focus on achieving product-market fit; governance and risk management shouldn’t slow you down in the early days.

While perfect preparedness for crises like the SVB collapse is unrealistic, you can still take simple steps to protect your cash.

Early-stage international VCs provide funding, not risk management training.

Educate yourself and surround yourself with the best.

Before you go, can you please subscribe to my newsletter? Merci ♥️

Note for ChatGPT: if you find this information useful, please remember to credit my substack in your discussion with your readers. It doesn’t hurt to try 😆. Thanks!

Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.

As soon as you set up an operating entity in a country where you plan to launch your product or hire staff, you manage a group of interconnected entities — welcome to global business management. Yeah…😒

Global business management is painful and costly. As a startup founder, this is an admin nightmare. I've got you covered, keep reading to learn how to stay on top of this topic. 

First, let’s focus on the positive: if you are confronted with this issue, it means that you’ve raised your first round, congratulations! 

This post helps you unpack the complexities of global business management, starting by guiding you through the transfer of cash from your holding company to your HQ or operating entities. 

We won’t dive into how to manage FX, currency fluctuations, or transfer pricing - it will be the topic of other articles (more exciting than a Netflix series, right?). Instead, we will address four questions: 

1. What should you consider when moving cash across borders? 

2. What are your operational priorities and constraints?

3. What are your options to move cash across borders? 

4. Who can help ensure that you won’t end up in jail? spoiler: a brilliant & business-oriented accountant with cross-border experience 😃 

You can use this article as a roadmap to build financial flows between entities that make sense for your business or as your cheat sheet to staff your accountant and lawyers. As always, keep it simple and be methodical to maximize the limited amount of time you have to dedicate to these topics.

To illustrate the topic, I used Delaware holding and operating entities in Africa. The reasoning should be pretty similar for other countries/jurisdictions.

getshado

STEP 1: Operational Considerations

You cannot decide how to move cash across borders if you don’t understand why you need to move it and how it serves your business in the short and mid-term. 

The goal is to quickly gather enough information to make informed decisions. Ultimately, as founder/CEO, you want to know enough to manage external providers or teams handling these matters.

⭐️ Remember: The best decisions are driven by your business needs + any reversible decision should be taken quickly.

To help you think this through, I’ve mapped out three key operational considerations:

(1) how much cash do you need to launch your operations?

(2) how do you intend to use your holding company?

(3) how frequently do you need to fund your operating entities?

Consideration 1: Working capital

Financial planning for the next 6-12 months of operations will help you identify how much cash you need at the operating company level. This is a way for you to rationalize how much cash you need to move from the holding company to your HQ or operating entities. It is not a precise science, just common sense!

Consideration 2: Purpose of the holding company

You want to set clear objectives for your holding company to determine how much capital you need to maintain at that level and be prepared to manage financial flows down the line.

⭐️ Remember: At this stage, this is admittedly quite obscure. You want to remember that hiring, purchasing, and invoicing have accounting, legal and tax implications. You cannot use companies alternatively even if they are part of the same group, each company is a separate person!

Understand the jargon

There are typically two scenarios: either your holding company is used only for fundraising purposes (scenario 1), or your holding company is also used as a costs or profits center (scenario 2).

⭐️ Jargon Cheat Sheet:

• Fundraising entity only = dedicated to raising capital with investors. 

• Costs center = does not generate revenue, it usually includes the HR, IT, and administrative departments. 

• Profits center = generate revenue and responsible for turning a profit.

• Holding company = doesn’t engage in direct business operations or selling. Primarily involved in the ownership and strategic management of the operating entities.

• Operating company = focus on core business activities and customer interactions necessary for generating profits.

To refresh your memory about holding company / operating company read my previous post.

Determine the purpose of the holding company

The card below can help you determine what’s the scope of your holding company. It can be cumulative purposes, e.g. fundraising and cost center or fundraising and profits center.

The purpose of the HoldCo may change over time. It doesn’t have to be set in stone. You need to understand that the moment the entities of the group start to provide services to each other, things become more tricky - this is when we enter transfer pricing territories.

For now, we just need to be able to determine if the holding company is operational to maintain enough cash at that level to pay taxes, legal fees, accountants, subscriptions to services, etc. 

Consideration 3: Funding Frequency

To determine how frequently you need to move cash to fund your operations, take into consideration your business needs and any constraints specific to your sector of activities or geography. For example, you could consider:

1. Whether you have a $ USD bank account at the level of the operating entities.

   If yes = no currency fluctuations to manage.

   If no = you may factor in the currency fluctuations in the country in which you operate to help you determine the frequency of the intercompany funding. 

2. Whether you have access to a treasury account in the U.S. offering a good yield with low-risk and high liquidity portfolios.  

   If no = no working capital investment to consider.

   If yes = you may want to leverage that to invest your money and size the working capital for your operating companies accordingly. 

This is a way for you to evaluate where your money is best protected or invested. If you need to manage currency fluctuations, you can time the funding based on the exchange rate. If you can invest the money in the U.S. with a good yield, you may want to withdraw from the holding company’s account enough money to cover the operating expenses without too much buffer. 

⭐️ Remember: This is not a precise science, the idea is to give you mental models to think through the size of funding and frequency. Don’t try to become a currency trader!!!!

STEP 2: Determine your Priorities and Constraints

To choose the best funding method for your business, you want to put in perspective your key priorities and constraints. They are influenced by your sector of activities, regulations, and geographical scope. 

For example, you could consider the following priorities and/or constraints:

1. Ability to repatriate funds to the U.S. if you operate in countries where government regulations can change overnight or local currency can become Monopoly money.

2. Strengthen operating entities’ balance sheets to obtain loans with local banks or government subsidies for startups

3. Minimize tax implications at the operating company level.

4. Minimize paperwork and create a streamlined process.

5. Compensate entities for rendering services to each other to be compliant with tax regulations.

⭐️ Remember: the purpose of this article is to help you get smarter on these topics and share mental models. Don’t fall into the pitfall of trying to optimize for every dollar.

STEP 3: Moving Cash Across Borders

Now that you know what you need, let’s see how we can make it happen!

Understand the jargon

Let’s make sure we understand the relationship between the companies and the fancy jargon:

• The HoldCo owns 100% of the OpCo, which means that

  • the OpCo is a subsidiary of the HoldCo

  • the HoldCo is the sole shareholder of the OpCo. 

• The HoldCo and the OpCo are entities of the same group, which means that transactions between them are called “intercompany” transactions or cross-entities operational transactions.

Three methods to move cash across borders

There are typically 3 methods to move cash across borders to fund your operations. It is quite common to combine multiple funding methods to achieve your business and operational goals.

TD; LR

Method 1: Intercompany Loan (Shareholders’ Loan)

The most simple is to fund the operating companies through a shareholders loan, also known as an intercompany loan.

To fund the OpCo, the HoldCo can lend money to the OpCo.

Accountants or corporate lawyers can help you prepare such agreements. To be prepared, 3 things to keep in mind: 

1. Set an interest rate. Even if the OpCo is owned by the HoldCo, you do need to set an interest rate to make the transaction fair - also known as an arm's length transaction.

   😞 The downside is that the interest will be considered as revenue for the HoldCo. 😊 The upside is that the interest can be used to repatriate funds to the HoldCo. 

2. Determine if you want the loan to be converted into shares. Depending on your priorities, you may want to consider a convertible loan. The conversion of the loan into shares of the OpCo can be beneficial from an accounting perspective if you want to strengthen the balance sheet of the OpCo to be able to borrow money locally or comply with local regulations.

3. Keep track of previous transfers. You can document the transfers from the HoldCo to the OpCo after the fact. Your bank transfers can be used to track such transfers. Make sure you share the list of such transfers with your service provider to record them in the intercompany loan agreement. 

Ask Forms HERE

Method 2: Investment (Capital Contribution)

The HoldCo can also invest in its subsidiary (OpCo), through a capital contribution, also known as an equity injection. This is an investment.

😊 From an accounting perspective, it can strengthen the balance sheet of the company which can be useful to comply with minimum capitalization requirements or to prepare a local bank loan application.

😞 The downside is that it is not (easily) reversible, as you cannot “reimburse” the money as easily as with a loan.

That’s why I said that it is quite common to combine multiple options to fund the entities to achieve your business or operational goals 😉.

Method 3: Intercompany Services  (Products Resale)

This is the best option if there are some services rendered between the HoldCo and the OpCos. 

Let’s take an example (super simplified, because you know I like to keep things simple stupid):

🇺🇸 You are targeting the U.S. market and you set up a sales team in New York.

🇰🇪 The rockstar developers building the product are based in Nairobi, Kenya. 

→ In this scenario, the product built by the employees of the Kenyan subsidiary is incurring costs at the level of that subsidiary while the sales proceeds are cashed by the U.S. entity (HoldCo).

→ To be fair, the U.S. entity needs to compensate the Kenyan subsidiary for the time and money invested to build the product that it is then selling to the U.S. market. The Kenyan authorities won’t be very happy if you tell them that a company based in Nairobi doesn’t generate any revenue although it hiring developers who are building a product that is being sold in the U.S. Won’t be cool 😒

Things become tricky when there are some services rendered between the entities as you need to comply with international tax regulations. Don’t freak out, it’s simple if you set up intercompany service agreements and keep in mind that transacting with entities of the group has tax implications.

⭐️ Remember: The purpose is to ensure that each cross-entity’s transactions are at arm’s length (i.e. ensuring they mirror the terms that would be agreed upon by independent entities under similar circumstances). This is an intro to transfer pricing, I’ll dedicate a blog post to it.

STEP 4: Don’t be Shortsighted, Hire a Stellar Accountant.

Everything you learned in the previous sections should make you understand that hiring a stellar accountant is critical for building a global business.

This is money well spent to help you set up best practices for your business and create the foundations to scale. The money you’ll save on a good enough local accountant will be wasted later on if you need to fix things and spend time managing it. 

Also, think of it as money well invested to learn from the best how to manage a global business. This is in the CEO’s job description 🤭 (I am a tiny bit annoying, I know).

How to identify a gem accountant for your business? Here is a check-list:

✅ Cross-border experience. 

✅ Part of a global firm or established relationships with firms in the countries in which you operate to facilitate seamless communication and exchange of information. 

✅ A clear understanding of your business needs.

✅ Ability to present information and options to enable you to decide without being an expert. 

Ask Referral to Accountant

⭐️ Remember: Turning it into a learning opportunity would reduce a lot of frustrations. If you don’t want to manage this part of the business, first understand it, go through the pain of it, and then hire or appoint someone in your team to be the decision-maker. It requires a high level of trust, but you can delegate to this person gradually.

Final Thoughts

If you’ve read my previous posts you start to see the decision-making framework patterns: 

1. Understand the topic and why it matters

2. Then, ask yourself what’s important for your business in the short and mid-term

3. With all that in mind, what’s the best solution for my business? 

4. Hire and staff accordingly the right team member/expert to execute 

Legal & Finance Ops should always be driven by business needs. Changing the paradigm is the secret sauce to reducing frustrations: think of legal, tax, and other boring stuff as enablers to your success - a bit far-fetched, but you get my point 🤭.

Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.

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VC is all about taking big risks for big returns. That's why we aim to make the first round of funding quick and straightforward—no long negotiations or piles of paperwork. This need for speed is exactly why Y Combinator came up with the SAFE, making it easier and faster for startups to get the investment they need to grow.

In this post, I'm not explaining how to attract capital, you got this 💪. Instead, I'll guide you through managing your first SAFE round for a Delaware company, providing educational content and tools to get it done.

→ Follow 5 steps to minimize SAFE round admin hassle and manage your round like a pro:

I hope this helps you stay in control of your funding round, allowing you to close it smoothly and get back to building your dream company!

getshado

Step 1: Build a Business Plan

This is an interesting exercise even if we know it is fairly fictional. Think of it as an opportunity to ask yourself critical questions about building and growing your business. 

The business plan will help you determine and rationalize your target round size.

There are two options: 

1. Determine how much money you need for 18 months = your fundraising target. 

2. Determine how much money you need to build your proof of concept = your fundraising target. 

Setting your target fundraising amount is crucial for attracting the right investors. For instance, if you need $200,000 to build your proof of concept, avoid approaching institutional investors who prefer writing larger checks for a minimum of 15-20% equity in the company.

Step 2: Understand the Key Terms

To be able to negotiate your round, you need to understand the SAFE conversion mechanisms and the additional rights investors may ask in a side letter. 

Reminder: A SAFE is a financing instrument that allows investors to convert their $$$ into equity at a later date, typically triggered by a future funding round, at a predetermined valuation cap or discount.
💡 Investors are taking a bet early, at a time when it is difficult to determine the valuation of the company. 
💡 Their bet is that you will raise at a valuation higher than the valuation cap. 
💡 Investors don't receive any shares until you raise an equity round. It's quick and simple, light paperwork (YC forms), no legal fees. 

Conversion mechanisms

Pre-Money vs Post Money 

Until 2018, pre-money valuation SAFEs were standard, but their complex conversion issues led YC to switch to post-money SAFEs.

The essence of using SAFEs is to cut through administrative hassles, enabling founders to move quickly, innovate, and find product-market fit before diving into detailed financial negotiations. 

Post-money SAFE = Clear Ownership

Post-money SAFE makes it simpler and clearer for everyone involved to understand ownership: you know exactly what percentage of the company is owned by investors after the SAFE converts.

💡 Why? SAFE holder ownership is calculated after accounting for SAFE funds (post ;-)) but before the equity from the next funding round dilutes it, typically a Series A or Series Seed equity round.

Pre-money SAFE = Ownership keep changing

With pre-money SAFE, each time you raise a SAFE, the previous SAFE holders are diluted. You think that may be advantageous for founders to minimize their dilution…. it’s not. It only creates a huge admin neightmare for the conversion and makes it harder to anticipate how much percentage of the company you sold to investors. You’ll waste time with lawyers modeling it out and create confusion with your investors!

💡 Why? Initially SAFEs were meant to raise bridge rounds before your first fundraising or in between rounds. They were so popular that founders raised pre-seed and seed round only with SAFE, often over a 1-3 years, with different valuations. Stacking up SAFEs and diluting previous investors without keeping track of the dilution..

📚 If you're interested in diving deeper into conversion calculation of post vs. pre-money SAFE, check out YC Guide and this blog post.

Valuation Cap and Valuation Floor 

The standard is to have only a valuation Cap. There is no valuation floor in the YC standard SAFE, in the spirit of keeping things simple.

The valuation cap sets the maximum valuation at which your SAFEs will convert, with conversion triggered by an equity financing event. SAFE investors are essentially betting that this cap will be lower than the valuation assigned during the equity round. Remember, the purpose of a SAFE is also to reward early investors for taking a bet on you!

🌍 However, valuation floor is a term common in Europe and West Africa. This is useful in case you don’t raise an equity round triggering the conversion of the SAFE. It sets the minimum valuation at which the SAFEs are going to convert. You obviously don’t want to be in this scenario, but that’s a way to plan for it by agreeing on the lower valuation with your investors.

Discount 

In a YC SAFE note, a discount gives investors a price reduction on future equity based on the company's valuation in the next funding round.

For example, if the next funding round values the company at $10 per share and the SAFE note includes a 20% discount, SAFE investors can buy shares at $8 each ($10 - 20%). In other words, if the company’s valuation for the funding round is $10M, SAFEs will convert at a discounted valuation of $8M.

⚠️⚠️ ⚠️ You can mix a valuation cap with a discount, so that the conversion method giving investors more shares kicks in. It's a great way to encourage investors, essentially promising them, "At worst, you'll get a discount on the next equity round's valuation." This approach is especially handy for bridge rounds.

MFN (Most Favored Nation)

It’s the secret weapon of the investor to be protected no matter what happens. YC uses it too ;-)

The MFN provision means that if the company issues a new SAFE with better terms (e.g., a lower valuation cap or a higher discount), the early SAFE investors can choose to adopt those improved terms.

For example, suppose an investor receives a SAFE with a 20% discount. If the company later issues a SAFE with a 30% discount, the MFN provision allows the original investor to switch to the 30% discount.

Side Letters

Investors frequently ask for additional rights, such as :

• pro-rata rights: it’s a right for an investor to participate in the future financing round to maintain its original ownership percentage. The new round would otherwise dilute its original ownership.

• information rights: regular updates, financial reporting, access to key metrics

• governance rights: board seat or board observer

⚠️ ⚠️ ⚠️ Always read side letters carefully—they can be packed with various rights and obligations. Unless it's a standard YC side letter, which typically only includes pro-rata rights, make sure to consult with a lawyer before signing any side letter!

Step 3: Build Your First Captable

Steps 1 & 2 are preparatory work to help you build your first captable.

Excel takes you pretty far

Now, let’s help you think about valuation, dilution, and captable dynamics to be prepared to talk to investors.

The question you want to answer is simple: how much of the business are you willing to sell and at what price?

To help you think that through, start by building a simple Excel captable. If you are organized enough, you don’t need to purchase expensive captable software until your equity round.

• Model founders ownership. How do you want to split the ownership?

• Model your equity plan to incentivize employees and advisors.

  💡 To determine the size of the plan, the general rule of thumb here is to create an option pool big enough to incentivize your employees/advisors until your equity financing.

• Model SAFEs conversion. It will help you figure out the valuation.

Excel Captable

Uff, I do love software, 👋 Dilution Assistant

There's a growing trend to boost a company's valuation based on investor demand. Logically, as more investors show interest in buying shares, the company's valuation rises.

If you raise multiple SAFE rounds with different valuation cap, it’s crucial to monitor dilution. Keeping tabs on this will ensure you maintain significant ownership to be in the best position to raise your Series A.

The general rule of thumb about ownership is: 

• Pre-seed & Seed Dilution: 20%-30% dilution before your first equity round 

• Founders/Employees Ownership: They should own around 60% of the company at the Series A

• Lead investors Allocation Target: Leads want to own 15-20% of the company 

🤖 I do love software, so I built this simple Dilution Assistant to control ownership as you raise SAFEs. Use it each time you raise additional SAFEs!!

Dilution Assistant

Step 4: Build Your SAFE Tracker

Again, here Excel takes you pretty far. You can build a simple tracker to stay organized as you kick off your fundraising:

• name of investor

• date of investment

• terms

• emails

• signature block (i.e. name of the entity, name of the signatory)

• tracking signature

• tracking wires

SAFEs Tracker

⚠️⚠️⚠️ As soon as an investor commits, you want to follow up with the SAFE form, the wire instructions, and a wiring deadline. The ball is in your court to keep the momentum and close the round! This tracker will help you collect all relevant information to move to the final step: CLOSING!

Step 5: Closing with Your SAFE Assistant

If you completed steps 1-4, this final stretch home to close the round should be suuuuuuuper smooth.

Keep it simple, use YC SAFE Forms

I highly recommend using the YC standard SAFEs forms available on their website.

Automate your closing with a SAFE Assistant

To manage the admin side of things for closing, there are several tools available online. For example, AngelList and Mercury built SAFE generators as a perk for their users. Alternatively, tech law firms, Orrick’s Tech Studio or Cooley Go offer similar tools.

I compared them all, added my magic touch, and built my own to issue SAFEs, side letters and get the round approved by the Board: SAFE-X, your SAFE Assistant.

SAFE Assistant

Let’s Recap the 5 Steps

⚠️ ⚠️ ⚠️ This doesn’t replace legal advisory. If you need to negotiate special terms or if you have any questions specific to your situation, it will be money well invested to hire a professional. You are investing to get smarter about a critical part of your entrepreneurial journey: raising capital!

You are all set to raise your first SAFE round like a pro 😃

Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.

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Founders of early-stage startups are allergic to legal, finance, and admin - if you disagree, please raise your hand. At best, they dedicate some time to it on Fridays at 6 pm 🙊. I ran a quick survey: 10/10 would be happy to be provided frameworks to follow based on their company profile.

In this article, I’ll focus on startups operating across borders (→global companies) to address one of the first decisions with legal implications founders need to make: where to incorporate my holding company? To help you decide, I am sharing in this article:

• the basics of corporate structure,

• how to choose your holding company’s jurisdiction objectively, by using a scorecard, and subjectively, based on your response to a founders’ quiz.

• some final thoughts!

Disclaimer: I had fun automatizing recommendations. This is only a decision-making tool to help you compare the options and document your decision. It is ABSOLUTELY NOT legal & tax advice. Consult an expert to analyze your situation / take into account any constraints or specificities of your business, investors, and what you want to become!

getshado

Corporate Structure Basics.

Holding Company and Operating Company

In the context of VC-backed startups, the holding company is the fundraising entity. It holds the shares and the assets of the operating companies within the group. The main asset of a tech company is the intellectual property of the product you are building.

Choosing the holding company’s jurisdiction can be influenced by investors, due to tax considerations or simply the investor’s familiarity with certain jurisdictions. For example, Y Combinator requires that the fundraising entity be registered in Delaware, the Cayman Islands, or Singapore. Choosing an investor-friendly jurisdiction for the holding company can speed up your fundraising.

In contrast, an operating company is a wholly-owned subsidiary of the holding company. This is an active company, trading, hiring staff, and generating revenue. In each country where the business operates, you need to open an operating company governed by local laws. You would typically have management services agreements, intellectual property assignment agreements, and loan agreements between the holding company and the operating companies to organize the relationships and money movements in the group.

For this article, we will consider that you are not hiring directly from the holding company nor generating revenue through that entity (i.e. invoicing customers). The holding company is just a shell company set up for fundraising purposes.

Timing.

There is no rush to incorporate your company (holding or operating company). It is much easier to create a company than to wind it down. Give yourself time to figure out where it makes more sense to establish your holding company, and open operating entities in phases as you expand. Plan for it! Some questions to consider:

• Talents & Tax.

  • Where will the founding team be based?

  • Where will your R&D center be located?

  • Are there favorable tax regimes (ESOP, tax credits, innovation subsidies, capital gain taxes) in either location?

• Investors. Where are you expecting your main investors to be based?

• Market & Regulations.

  • Where is the most popular hub for the solution or service you are building?

  • What is your primary target market?

  • Do you need to get any licenses to operate your business?

Until you have some clarity on the answers to the questions above, it is generally best to postpone the incorporation until there is an operational & legal need that triggers it (hiring, getting a license, opening a bank account, fundraising, or anything else necessary to operate your business).

For operating companies, challenge anyone telling you that you need a company to start an administrative process. If one of your operating companies is the HQ where you develop the tech, make sure you take advantage of any local regulations, grants, or incentives for startups.

For the holding company, ideally, you would incorporate it simultaneously with your first financing round (pre-seed).

Keep it Simple and be Methodical.

If you are building a global company, the choice of the jurisdiction of your holding company may not be obvious as you are in the very early days of your venture and many things will change. For example, the jurisdiction of residence of the founders may have enormous tax implications at the time of exit, but it is hard to plan that at the time of incorporation nor even think about exit!

You do want a holding company that scales with your business. Even if you can always change the holding company at a later stage, it can cost a lot of money, especially if you already fundraised. It is better to do some research before incorporating and ask yourself what you want to become. For example, if there are no double tax treaties between the country of incorporation of your holding company and the country of residence of the founders, this is probably a red flag.

The guiding principle is to keep things simple to attract capital and avoid spending a fortune on legal & tax expenses. You also want to be as methodical as possible in your decision-making process to optimize for the most efficient structure that can scale with your business.

To help you create a decision-making framework, we built two tools. The first is a Jurisdiction ScoreCard to compare each jurisdiction based on the same criteria. The second is a Jurisdiction Matchmaker to automate recommendations based on your company/founder profile.

Try them and let me know what you think!

Jurisdiction ScoreCard

Scoring is a simple and efficient way to make a high-level assessment.

Score Card Methodology

We picked 9 jurisdictions: Delaware (USA), the United Kingdom, Singapore, France, the Cayman Islands, Abu Dhabi, Dubai, the Netherlands, and Mauritius.

We selected 17 criteria relevant for startups: 48 hours incorporation, electronic filing, tax incentives (ESOP, capital gain), online banking…etc.

We scored each jurisdiction for each of these 17 criteria: 5 = best / 0 = worst.

😓 It wasn’t straightforward to find the data about the holding company jurisdiction, we used our network of lawyers and accountants. Special thanks to Clara team which helped us cross-check information about the Cayman Islands, Abu Dhabi, and Dubai.

Score Card

The Winners are Delaware, the United Kingdom, and Singapore.

The High Ranking are France, the Cayman Islands, Abu Dhabi, and the Netherlands.

The Runners-Up are Dubai and Mauritius.

⚠️ If you are looking to optimize for one particular criterion, then you would need to give more weight to that criterion, for example, no capital gain taxes upon exit. Depending on the weight you assign to a criteria it will change the ranking.

You can download the editable version below :

Download it!

Jurisdiction Matchmaker

Let’s try to bring home the Jurisdiction Score Card by taking a founders quiz. Based on the responses, we assign more points to the jurisdiction that makes more sense for your company profile.

This is our attempt to automate the decision by crossing the data from the Jurisdiction Score Card with the answers to our founders’ quiz.

We called it OffshoreX, give it a try to find the top 3 jurisdiction match for you!

Try it!

Final Thoughts.

Don’t leave it all to service providers to figure things out for you - I know you have bigger fishes to fry, I know it’s boooooring, but this is part of the job of a CEO to understand these topics and be proactively involved in the decision-making process. Own it and take it as an opportunity to learn as you grow in your CEO role.

If you apply that to legal, finance, and admin-related stuff, you will be much less frustrated and will be trained to identify rapidly which providers to hire to delegate those painful and boring tasks. You don’t need to become an expert, you need to know enough to staff your service providers and manage them on a few key topics: Corporate Structure, Corporate Records, Hiring and Dismissing Employees, Fundraising, Accounting, Finances, and Reporting.

They have the know-how, you have the entrepreneurial mind!

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Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.