Global Founders' Headache #1: Where to Incorporate your Holding Company?
Finding the right balance between an optimized corporate structure and the fact that you are working on something new.
Working with founders of VC-backed companies for the past 6 years, I realized that there is a need for decision-making frameworks for key legal matters that are the same across startups based on their profile (corporate structure, fundraising strategy, target markets, sectors, founders geographic location, growth stage).
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!
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 :
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!
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!
Disclaimer: nothing in this blog post should constitute legal or tax advices, use it to educate yourself and hire experts.
Hey Rena! This is such a useful read, especially for new founders like myself. I have 2 questions, how does the corporate structure look like for an impact based start up? Do you have any material around that? And secondly, is it possible to set up the fundraising unit as a nonprofit, while the operating units as for profit?