Going from an operating company in Latin America to an offshore corporate structure is a common requirement for venture-backed startups. We call the process a "flip."
When you decided to start a business in Latin America, you took the obvious step: creating a legal entity in your country of operation. On legal terms, the day-to-day of your startup has been going pretty well since then. So much so that now's the time to take the next step: talking to venture capital investors and raising funds.
But there's a problem. You might need to change your startup's corporate structure to fit in with VCs' requirements.
"Getting another corporate structure without dissolving the existing company and incorporating a new legal entity from scratch" may sound very specific. But we'll let you in: other startup founders have gone through that same problem.
The solution actually has a well-known and simple name: flip. And, with the right guidance, you can easily flip your company structure.
Picture this. You started a company, reached product-market fit, and acquired a bunch of customers. Now, you're in talks to raise a US$ 1M Seed round led by a famous US venture capital fund. Everything seems perfect.
But, as the venture capital fund is getting ready to make a verbal commitment, the investors let you know that they can't invest directly into your local entity in LatAm.
Why, oh why? When it comes to making an investment, VCs are very keen on having predictable governance. They can't accurately assess an investment's risk if they can't anticipate and plan for the worst-case scenario. And how are they going to do that in a country with laws and liabilities they're not familiar with?
You might be thinking, that's not the end of the world, right? Theoretically, you could just start a new legal entity and transfer the intellectual property rights. But remember this: you put your life savings into keeping the business afloat before it was profitable. You have customers. You have people on the payroll.
Just thinking about how to move all of that and not get in trouble with local authorities might have just given you a headache (it did to me).
What if I told you there was another way?
That's what a flip is for. A flip lets you maintain your original legal entity in your operating country while adding one or more holding companies on top of it. Instead of owning shares of the company in your LatAm country, you'll own shares of the holding company, which in turn will own 100% of the operating entity.
A flip can become necessary if:
When a flip is done properly, your intellectual property and equity stake at the company will be protected. That's why we'll give you an important note right now: you'll most definitely need legal counsel to flip your corporate structure.
With the help of your trusty lawyer, the process of flipping your company will be as follows:
You'll first need to incorporate in the country or countries of your choice. The incorporation process is widely different from country to country, and common choices for Latin American founders are the Cayman Islands and the US.
At this step, the new company's cap table will be purely symbolic and will be changed later, so worry not.
For an offshore company to own a local company, there can be legal requirements depending on the location–for example, foreign entities who own shares of Brazilian companies need to register for a CNPJ number, which is much like a tax ID.
Local legal counsel can walk you through the specific steps required in your country of operations.
Now things start to get good: it's time to reflect the ownership of your original company in the new one. This typically happens through what is known as a symbolic transaction.
You can think of it like trading cards: the shareholders of your operating company will exchange their shares for equivalent equity in the new holding company. They'll do a wire transfer transaction to have a paper trail to register with local regulators, which will have different requirements and tax implications depending on the operating country.
The resulting equity breakdown before the flip and after the flip will look something like this:
Once your new and shiny corporate structure is set up, it will need appointed representatives in your country of operations, since technically speaking they're now the sole owners of the original legal entity.
You'll need to assign "power of attorney" to someone on behalf of your offshore holding, and they'll be entrusted with the powers and responsibilities of representing the foreign entity on the local level. This role usually falls to one of the co-founders.
We're down to the final sprint to the finish line. Depending on the country of operations, you'll need to let authorities know who the individuals behind your corporate structure are. This won't be mandatory for all countries in Latin America, but it's a common requirement throughout the region. Your lawyer will be able to best guide you on the specifics.
It really depends on the complexity of your specific case and the corporate structure you'd like to flip into. The more shareholders you have on your cap table, the longer it will take to get things looking tidy.
A flip will take at least 6 weeks from start to finish, but the timeline can easily stretch out if you've raised several investment rounds. Make sure to set clear expectations with your advisors to understand how long the entire process will take.