Should I incorporate my company in the UK or the US?

Where should you incorporate your company? So you’re based in the uk, you’re a UK founder, and traditionally you would just start and incorporate your company in the uk. What could be easier? Costs 50 pounds on company’s house, takes 30 minutes and you are sorted. But actually an increasing number of people are calling us ATSE Legals and saying, where should I incorporate? Should it be in Delaware? Should I make a Delaware C Corp or should I create a UK company?

So let’s spend a few minutes to see what is best, because I think many, uh, founders on making incorrect decisions or making decisions for the wrong reasons and then having more friction than they end up with. So (···0.9s) the desire to incorporate in Delaware is that everyone’s seen those tech crunch articles, us valuations, uh, US amounts raised. Now that I’m in New York launching Seed legals in the US I see on the ground and talk to founders, typically raising maybe four times the amount that a UK found at the same stage would raise at maybe four times the valuation.
And I’m guessing in the West coast, in Silicon Valley it’s even higher.

So there’s definitely a big desire (···0.6s) for the bright lights of the US in terms of an incorporated company. But the question is, will having a US Delaware company (···0.6s) change anything? You can incorporate a Delaware company, you can use Stripe Atlas, you can use doula or others.

It’s like $500. It (···0.7s) used to be a super complicated thing. It’s now pretty easy. So (···0.8s) the cost of making a Delaware C Corp is small. There are overheads and there’s a schlep and so on. And you’ve got to deal with all the states and other filings. But broadly it’s not a big deal. But obviously (···0.8s) it can’t be the case that spending $500 to create a Delaware C Corp suddenly makes you much more attractive to US investors. So let’s look at the fundamentals.

So it’s clear over the last years at Seed Legals (···0.8s) that when investors want to invest, they typically invest in companies that are in the same country as them. It’s not always the case. Maybe 20% of the time we say UK founders raising into their UK company from US investors, but the most of the time it’s investors are gonna invest in the same country. Why? They understand the market, they know the competitors, they can meet the founders, they can go by and see the team, they know the team’s salaries.

Maybe they can get involved in help. And also they’re familiar with fundraising and they’re familiar with the fundraising legal documents in that country. So all of which is to say investors are normally looking for (···0.8s) investments in their home country. So the challenge is if you are targeting UK investors, (···1.6s) angel investors, you’re probably offering SEIS. If you’ve got a UK company, it all works together nicely.

But as soon as you’ve got a US company and you’re raising from UK investors, there’s some more friction. (···0.6s) Are they competing with US investors for different valuations? (···0.6s) Will it affect their SEIS? And if you are raising from US investors into a US company, there is perfect fit. However, if the investor goes, great, where are you guys based? And you go, well, London and where’s your market uk? Then the fact you’ve got a Delaware C Corp may not really help because you’re still in their eyes, the UK company.

So (···0.9s) in terms of the decision making on what to do, I (···0.6s) would say as follows, which is firstly, when building a company, you want to be laser focused on the most important things that are gonna make your business success a success or a failure. And shuffling legal, uh, paperwork and doing, working out taxes in foreign jurisdictions is not it. It’s getting to product market fit, it’s building a product, it’s talking to your customers.

Anything else is just noise and to be avoided or (···0.5s) kicked into the long grass until later. So if you are, uh, in the UK and you’re primarily servicing a UK market, then the natural fit would be a UK company. And since it’s so easy to do and you don’t need to think about any issues, (···0.5s) my suggestion is by default that’s the place to go.

And when you are ready to expand to the US and when you’re ready to raise from US investors, you can do what’s called the Delaware flip if that turns out to be necessary. Now it turns out that for the most part, US investors, (···1.5s) if I investing in a later stage company, are happy that the company is based in the uk. If it’s a super early stage company, (···0.5s) the investors will probably increasingly, uh, want it to be based in the US but they’re also gonna want the founders to be based in the us.
So if you’re based in the uk, it then leads to broadly two scenarios. Number one, crack on build your company, create a UK company, deal with expansion into foreign markets and foreign, uh, you know, incorporation later you can still look to raise from US investors, but you’ll likely be raising primarily from UK investors.

(···0.7s) Or (···1.0s) if the US really is your playground and you really want to raise those amounts and you’re having difficulty raising from UK investors, get on a plane, go to New York, go to the Silicon Valley, uh, hang out there and be a thoroughly American company to attract US investors.

So (···1.2s) the last piece of the puzzle is the Delaware flip, which is you start as a UK company and then you flip to the US later you create a Delaware C corporation. ’cause those are the ones that investors always want and it becomes the top company and owns your UK company.

Now this turns out to be a bit of a pain stew, particularly if you’ve got SEIS or EIS investors in your UK company. So the way that you preserve their s EISs, which of course you really want to do and they really want you to do, you can’t just take SEIS money and then have them lose it. So if they’ve held their shares for less than three years, then the the formula is (···1.0s) you are going to create a Delaware company giving them a mirrored cap table.

So the equivalent shares in common stock to be SEIS compatible in the new Delaware company, uh, to match their, uh, shareholding in the UK company. But before you do that, you need to apply to HMRC for pre-approval for the Delaware Flip, explaining that it’s for commercial reasons and so on. And then HMRC give permission. Then you create the US company with the mirrored cap table. (···0.8s) And then of course you separately need to deal with IP transfer issues and things like that.

But you can sort it all in the past you’d have to pay a lawyers huge amounts. It’s illegals. We’re trying to make that much easier. We can’t help on the tax advice, but the Delaware C Corp, uh, the Mard cap table, having everything on one platform, we can sort that all for you. And if you’re just creating us subsidiary to hire people and do business in the US we can do that as well. So (···1.0s) the Delaware flip is something that you could consider later when you find investors who insist that you have a Delaware top company and won’t invest in your UK company otherwise, or of course if you ultimately move to the US and now wants to be seen as completely a US company.

So I hope that helps on the, (···0.5s) should I incorporate in the uk, should I incorporate in Delaware or should I do one and then move to the other? Um, hope that helps. And if you need more, reach out to me or hit hit the web chat on Seed Legals and of course we can now support you in the UK or the US and give you a seamless expansion in one platform with everything in one place, together with the help and advice to help you grow and expand in the us.
Thank you. (···0.4s)