What is FLIP?

A strategy commonly used by startup companies with the purpose of accelerating their growth is to change for more mature and consolidated markets. This conduct generates a corporate inversion in the company, known as FLIP, whose main purpose is to attract foreign investments and a future M&A process.

In the case of foreign investors and funds or even Brazilian funds structured outside the country, the requirement for an international holding structure is common for the execution and centralization of the capital contribution.

Thus, the entirety of quotas or shares of the startup company is transferred to the new company incorporated abroad, which becomes the controller of the operating company’s share capital. The startup founding members and other investors start concentrating investments in the new foreign holding.

Basically, what happens is that the startup company becomes a wholly-owned subsidiary of the foreign company. The foreign company serves as an investment vehicle so the contribution made abroad is used by the startup company in its home country.

FLIP is also an instrument commonly used for Brazilian companies going public in foreign stock exchange through an IPO (Initial Public Offering).

Even though the FLIP represents multiple benefits for startups, it is extremely important that, prior to adopting this strategy, an analysis of the corporate structure to be adopted is carried out, considering the goals of the founding partners and other investors, as well as the respective tax impacts.

It is natural that the investors of a startup that is successful in the market understand that the M&A process is the next strategic step that should be pursued (startup exit with the total or partial sale of the equity interest in the company).

When incorporating an international holding in a FLIP process, it is very common to use corporate structures such as the American C-Corporation (C-Corp) holding in Delaware or a holding in Cayman with investments in a Limited Liability Company (LLC), among other structures that may also be used.

The sooner, the better. The sooner, the lower the cost and the fewer, the less transactions will be required.

“We established the company in 2000. In 2010 we gained traction in several regions accross Brazil. Looking back, I realize that a software company that has no ambition of going global is starting off on the wrong foot. It took us a while to come to this conclusion. In 2012, we noticed that if we didn’t expand, we wouldn’t be able to defend ourselves. So we started going public in other countries in Latin America. Then in 2016 we started considering the FLIP process. It took over two years to be carried out, since we had trouble finding the optimum structure.” – Geraldo Thomaz, VTEX Co-CEO and founder.

When the company makes the decision of “Flipping”, it is crucial that it analyses the tax impacts it will bring to the operating company and the shareholders. Our team works with a lot of corporate tax planning every year.

The internationalization of the company’s structure is key for foreign investors to take interest in the business. The majority of investors in the USA, for instance, don’t want to take the so-called “Brazil risk”, since they don’t know the Brazilian legislation and there are many bureaucratic issues in Brazil.

Therefore, to get attract investments abroad, the startup must invest in good tax and corporate planning, identify the short, medium and long-term goals and initiate the corporate restructuring process outside the country. The most common types are the Delaware FLIP, which involves incorporating a company in the state of Delaware, USA, or the FLIP in an Offshore jurisdiction, such as Cayman.

For more information about Flip, please visit: https://drummondadvisors.com/startup/en/how-to-do-a-flip/

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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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