TL;DR: The Cayman Sandwich corporate structure isn't just useful for receiving your startup's first international check. In fact, the Cayman Sandwich makes these three exit strategies easier:
You might be building your startup in a small city on the outskirts of Latin America, wondering if that's going to burn your bridges with investors.
Guess what? Where you're from doesn't matter anymore. In this brand-new remote world, geography can’t stop you from raising capital from global venture capital firms and conquering the best exit down the line.
But there's another thing that can stop you from these big money moves: setting up your startup in a way that scares international investors.
You have to add international layers on top of your local legal entity – and that's the Cayman Sandwich.
We've talked plenty about how this corporate structure is commonly used by Latin American startups to become venture-backable on a global scale, but the Cayman Sandwich is not just useful for receiving your startup's first international check.
It can also help down the line when you're thinking about your startup's exit strategy. In fact, the Cayman Sandwich makes three exit strategies easier.
Here's a summary of how the Cayman Sandwich works and what startup exit strategies get better with this corporate structure.
The Cayman Sandwich is the nickname given to a corporate structure used by startups in Latin America to attract global venture capital investments, streamline legal procedures, and achieve tax efficiency.
This business structure is called like that simply due to the three layers of the Cayman Sandwich, which are:
1. A Cayman holding company, with investors and individuals holding shares at the top. This holding company owns 100% of the shares of:
2. A Delaware LLC intermediary, optimizing for exits and adding disclosure advantages. This Delaware LLC owns 100% of the shares of:
3. A LatAm operating company, isolating all of the legal liabilities.
As of the last ten or so years, the Cayman Sandwich has become something of an industry standard for LatAm companies. And simplifying exit strategies is one of the reasons. Let's see which startup exit strategies benefit from the Cayman Sandwich corporate structure.
Merging your startup with another company is easier with the Cayman Sandwich structure. It's not only faster but also cost-saving.
A merger in the Cayman Islands can be done through a single inexpensive filing, called a Plan of Merger. This plan is not subject to government agency scrutiny, such as the American Department of Justice.
That means your Certificate of Merger can be issued in 5 working days after approval, or you can have an Express Certification available within 48 hours via an additional fee.
Instead of a merger, you can go for an acquisition and give full control to the buyer of your startup. Guess what? That's also easier if your startup has the Cayman Sandwich as its corporate structure.
If your startup is not bound only to local incorporation, of course, you have more flexibility in terms of where and how to sell your business. The world is your potential buyer.
Picture this: the LLC can sell the assets or the shares of your local operating company, your Cayman entity can sell the shares and assets of your LLC, or you can just up and sell at the Cayman level.
But the benefits can also be seen on the bottom line. When selling your shares, you're exempt from corporate capital gains taxes.
You're also not subject to double taxation across different jurisdictions, even if you have many layers to your sandwich. Selling at the Cayman level or at the Delaware level will not bring any surprise foreign corporate taxes.
Finally, the Cayman Sandwich also has disclosure advantages with LatAm and US regulators. Here's an example given by Dan Green, from the law office Gunderson Dettmer, on our Latitud Podcast.
Cornershop was once negotiating a sale to Walmart, which never happened. They had to pass through a review of their business, and the Mexican antitrust authority sent a request for documents they wanted to see.
All typical stuff so far. But unpacking this request, they wanted governance documents and financial statements of all venture firms that had equity in Cornershop. Some of these funds were in Silicon Valley, and they said, "no way we're sharing all of that with a non-US regulator. We don't even do that in the US. That's a dealbreaker for us."
Eventually, Gunderson was able to structure the transaction as a sale of the LLC and not of the Cayman entity. With that, they'd only need to provide information concerning Cornershop. The investors were out of the loop – and the deal then looked much better.
In summary: you can efficiently exit your startup to both local and international acquirers with a Cayman Sandwich structure.
Wanna go the public route? First of all, take some hints from Nubank's initial public offering. Second, check below how the Cayman Sandwich can help with the IPO as an exit strategy.
When you publicly trade your startup's shares in US exchanges, such as Nasdaq and NYSE, having the Cayman Sandwich as your corporate structure has added benefits. You're eligible for Foreign Private Issuer rules with the SEC. This leads to a more relaxed reporting schedule. For example:
1. You don't have to report your startup's results quarterly, like US companies;
2. You also have more lax reporting timelines on most mandatory filings. For example, you can file an annual report known as Form 20-F up to 120 days after the end of the fiscal year.
3. Finally, you're exempt from US proxy rules on sharing info with shareholders. The US' rules require you to provide certain disclosures and explain matters up for shareholder vote – for example, you'd need to put management and executive compensations out there, and shareholders could decide if that's adequate via their "say on pay rights". Being a Foreign Private Issuer, that's not essentially mandatory. You'll follow the rules of your home country.