How to do a FLIP?

Step-by-step for a Flip Delaware

  • Step 1:

Creation of a new Delaware (Holding) company by the members of the Brazilian company (BR Company).

  • Step 2:

Obtainment of CNPJ for the Delaware Holding.

  • Step 3:

Amendment of the BR Company’sArticles of Organization to include the Delaware Holding as a member.

  • Step 4:

Formalization of the contribution of the BR Company’s quotas in the Delaware Holding (in USD) by its members, in corporate action performed by the Delaware Holding.

The SCE-IED – registration of the foreign investment before the Brazilian Central Bank – will be required only for foreign investment above US$ 100,000.00 (one hundred thousand dollars).
The symbolic exchange is no longer required for Flip transactions and therefore IOF (Tax on Financial Transactions) will not apply.

Delaware + Offshore Flipping (BVI, Cayman and others):

The following is added:

  • Step 5:

Creation of a new Offshore company (NewcoOffshore) by the members of the BR Company

  • Step 6:

Contribution by the Members of shares/quotas held in the Delaware Holding to the Newco Offshore.

This is the “upwards” Flip, in which the Delaware Holding remains from the start directly linked to the BR Company. Another possibility is the “downwards” Flip, in which the members of the BR Company contribute their quotas/shares to the Newco Offshore and, subsequently, NewcoOffshore incorporates a Delaware Company, investing in Delaware the assets of the BR Company.

After FLIP, the American (or offshore) company becomes the owner of the Brazilian company. It is important to stress that in most cases, the American company is incorporated in the State of Delaware, as it is a state with robust corporate legislation and broad court precedents in terms of corporate conflict, facilitating the incorporation of companies and the fundraising process, while also presenting a few tax benefits. The structure Offshore > Delaware > Brazilian company is also very common.

From the practical point of view, it is simpler and cheaper to incorporate the company in the USA first, since “flipping” involves a costly corporate restructuring.

The life of a startup, in most cases, begins with funds from the founding members, however low they are. Part of these companies arise from projects in existing companies, and, sometimes, already have customers, which makes the entrepreneur’s journey smoother. The first customers are crucial for the adjustment of the product, for team training and understanding the market needs.

In the beginning of the life of a startup, attracting foreign resources is often needed. Since these companies usually don’t have access to fundraising via financial institutions, entrepreneurs end up turning to “angel” investors – usually individuals with capital for risk investment, family members and friends. This stage often takes place without a detailed due diligence process or formalities.

In many cases, the angel investor enters the company via convertible debt, either due to the abovementioned lack of formality in the investment process, or due to the uncertainty regarding the future success of the investee company. Convertible loans are investments made in the form of a debt, with the right to convert it into equity interest in the future.

In the United States, in addition to be convertible debt modality, investors may also invest by using an instrument – much simpler and used in early-stage contributions – called “SAFE” – Simple Agreement for Future Equity.In this instrument, which is not considered a debt, the parties don’t need to calculate interests or maturity date, but as in a convertible debt, they discuss “ valuation” and “valuation cap” in connection with future conversion events.

Alternatively, to the investment via debt, there is the investment through equity, through the purchase of equity interest investment in which the company sells equity interest to venture capital funds.

To make it clear, by seed we mean the first priced investment “round” in which the investor becomes member of the company. This first investment can also be referred to as “Series A”, in the absence of a “series seed”.

In addition to the investment mechanisms mentioned above, there are several others, such as “crowdfunding” and participation in acceleration programs – sponsored by the government or by private entities.

Post-FLIP Taxation

After completing the FLIP, the dividends initially become irrelevant. This is because, as a rule, once the company attracts funds from investors, it is not expected to distribute dividends in the short-term. Institutional investors are not interested in short-term returns, but rather in the operation’s substantial growth, so the company reaches an appropriate size for a larger round, an M&A or even an IPO.

How to equate the fact that Brazil does not have a tax treaty signed with the USA? Would there be double taxation? The answer depends on the type of structure to be established. In the case of a capital gain earned by an investor on a foreign asset, in general rules the taxation takes place in the country of tax residence of such investor. However, in the case of investments through different property holdings, the gain can be earned at the holding level, which can affect the moment and the rate of taxation at the investor or founder level.

How to negotiate your company’s valuation with a fund: what is the founder’s position?

Tips from the founders:

“Expose yourself, meet a lot a people. There is no ideal investor, there is the investor who liked your business and wants to commit to it. As you get lots of people interested, you create a competitive environment. The best recipe for you to find good investors is having a good company. This should be your focus, then they will come.” – Geraldo Thomaz, VTEX Co-CEO and founder.

“If you want to over maximize the valuation at the start, rather than having a good investing partner, you could be making a wrong decision.” – Goldwasser Pereira Neto, Accountfy CEO and founder

“The fundraising must have a start date and an end date, if you want to get the investors’ attention. It is a sales process, that is, you have to assemble a pipeline with all the funds you wish to talk to. From the moment you start the fundraising, every week you have to provide a report with updates to make it clear for everyone in your investors pipeline that “you are in the game”, and that you are speaking with the market, you are raising funds and there will be an end date for that. If you don’t set an end date, you will never see this term sheet (investor’s offer) to join your business. Don’t inappropriately let people simmer. Conduct a transparent process, without necessarily telling who are the other funds involved.” – Guilherme Cerqueira,Worthix CEO and founder.

Option pool: important point

“When negotiating with a fund, consider placing theoption pool in the post-money valuation. This way, the investment will go in and will dilute not only your own money, but also the investor’s money. If you create it at the start, the valuation will also be diluted accordingly. It’s better to have it very early on or at the time of the post-seed round” –Pedro Drummond.

What is SmartMoney?

“It effectively helps the entrepreneur in search of seed. I review 2,300 companies a year and invest in 11. Out of those 11, only 3 will succeed. The best entrepreneurs are those who have several alternatives on the table and choose you.” – Rodrigo Baer.

Is it important for the entrepreneur seeking investment to have prior experience with running a business?

“When I choose an entrepreneur, I consider what he’s been through, how “tough” he is, in addition to the knowledge of the business he intends to run. We invest in around 10 to 15 companies per month. Our most valuable  assets are the entrepreneurs.”– João Kepler.

Tip from the founder:

“People need to understand that if the founderdoes not create a cooperative environment with the investors, he’s not going anywhere. There is no point in fighting with investors during the negotiation, on the next day you will be working together.”, Pedro Drummond.

The role of the investor:

“The entrepreneur must be capable of changing and learning how to deal with difficult situations. The role of the investor is to support the entrepreneur and to prepare him beforehand. The investor has to be an advisor.” – Geraldo Neto.

When is the best time to consider opening a foreign structure in terms of revenue?
The sooner, the better. The smaller the company, the harder it is to implement a corporate restructuring. Large structures usually involve more stakeholders, liabilities, contracts. There fore, the sooner, the better.

Word from the founders:

“Those who are founders and have already raised funds, know that the moment when you are about to raise funds is really tense. It is a great responsibility. And each time an investor comes, worse than changing the threshold is the promise that your threshold is going to change. It has to be well thought-out. Here’s an advice I give you: the business is risky for everyone, not just for me. And everyone is required to make the company grow. But it can go wrong. And if it goes wrong, the investor can’t get angry. He can get angry if you were negligent, omissive, etc. Otherwise, he can’t get angry.” – Geraldo Thomaz, VTEX Co-CEO and founder.

“You have to be transparent with your investor fund. Only then it will understand where it is, who you are and where you are. And that has nothing to do with being a brown-noser to the investor. You are not working for him, but for the customer. To me, a company is a group of people committed to making a dream possible. And investors are part of this team.” – Guilherme Cerqueira, Worthix CEO and founder.

Tip from the partner: “Create a cooperative environment with your partners. If this cooperative environment does not exist, it’s not going to work”, Pedro Drummond.

How to find the right fund and angel investor?

Founders ‘ Opinion :

“Look for a serious investor with a good reputation. Reputation is the key.” – Goldwasser Pereira Neto, Accountfy CEO and founder

“A good investor is the one who likes your business.” – Geraldo Thomaz, VTEXCo-CEOand founder.

“When you are looking for an investor, pay attention to the questions they ask. Pay attention to the investor who focuses solely on costs rather than the company’s vision or future avoid choosing such investor. Perform a proper due diligence with the funds.” – Guilherme Cerqueira, Worthix CEO and founder. from Worthix

Why invest in Brazilian startups?

The investors’opinion:

“My role is to prepare “brides” (companies) to get married down the line. I have been asked this question a lot lately. The news has been drawing attention and the market has been busy with many deals recorded. I invest because I wish to democratize the access to capital.” – João Kepler, angel-investor, host, and CEO of BossanovaInvestimentos.

Scenario of angel-investments in Brazil

“There are many people in Brazil writing the seed check without fully understanding the risk they are taking. The adverse selection in this market is brutal. If you don’t aim to be the best investor for the best entrepreneur, your chance of return is zero.” – Rodrigo Baer, Managing Partner – Early Stage at SoftBank LatAm Fund.

“When I started as an angel-investor in 2005, there was no ecosystem, there was nothing. I see how much Brazil has grown. Now we have several very well-organized groups of angel-investors in Brazil. We realize that the profile of entrepreneurs is more mature. When we compare it to the USA, there is still a large difference between the two markets, but Brazil is making progress.” – Geraldo Neto, Co-founder GAA Investimento.

How much does the founder have to be diluted in the early stages to arrive well-structured in the Series A?

“The easier answer is: if you have over 30% dilution before the Series A, it’s not going to happen, because the Series A and the Series B will dilute the founder even further. They can’t be diluted to the point where they lose the incentive to keep working. – Rodrigo Baer.

“In Brazil, there is a certain perception that if the company is in the very early stages, I need to acquire a larger interest/stake, because the risk is high.” – Geraldo Neto.

Tip from the angel-investor:

“Something we work with a lot at Bossa Nova is governance. We establish control and compliance from the beginning, because this is something nobody thought about in the past. We know that it will be necessary down the line. The documents, accounting, everything has to be organized. Entrepreneurs have to be increasingly prepared from the start.” – João Kepler.

How to start the fundraising?

“Before starting the fundraising process, there are three things a startup founder needs to do: hire the team, establish a strategy and ensure that there is enough money for the company to stay alive. The founder must maintain constant conversation with the investors. It is not a closed process; it is an ongoing process. In Brazil the process of initiating a round typically take around 6 months.” – Rodrigo Baer.

“The best time to raise funds is when you don’t need the money.” – João Kepler.

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DISCLAIMERS

  • Fees include ordinary filing fees (emergency fees charged separately).
  • Fees do not include expenses associated with documentation, such as registry fees, postage, translation (except standard sworn translation for the CNPJ documentation), etc.
  • The estimated time frame assumes (i) payment of ordinary fees for opening the company (no urgency fee) and (ii) agility of the client in collecting signatures with partners and other stakeholders.
  • The incorporation of the company in Cayman will have an additional governmental fee of US$900 + US$1,800 of registered office fee pro rata on the year of company’s formation + annual maintenance expenses (approximately US$3,400 per year). The incorporation in Cayman requires “Anti-Money Laundering” and “Know Your Client” procedures; fees include procedures for up to 5 shareholders.
  • The Cayman Flip is included (which costs about US$3,000 and are charged by the Cayman firm), on the presumption of a standard Flip of up to 5 shareholders.
  • The negative scope is not intended to list all activities excluded from the scope. The negative scope is exemplary, listing activities that are commonly required in connection with the Flip. Activities not expressly listed in the scope will be charged at the standard hourly rate as per Drummond and its partner in Cayman.

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