Startup specialist firm Beauchamps Solicitors join us to answer startup legal queries.
This month, lifecycle marketing platform SparkPage needs some advice on raising funds in the US:
If an Irish start up or early stage business is raising funds in the US, will investors require it to be a US entity, and if so what can the Irish company do?
Is it really necessary? From our experience, it is not always necessary for the investee company to be a US entity. Certainly, some US investors prefer to invest in US corporations as they are more familiar with the structure and the form of documentation. However, it is not always legally necessary from the VC funds perspective and many experienced US investors do not have an issue investing directly into an Irish or other overseas entity. The reality is that investor preference will drive how the deal is done.
Documentation: The form and style of US investment documentation is different to Irish or UK investment documentation and a US investor may prefer to use documentation they are familiar with for its investment. This can be achieved by using US style look and feel documents (incorporating all the protections a US investor would expect) even if governed by Irish law.
Flip-up: That being said, we understand that certain US based VC funds are prohibited by the rules of their fund from investing in companies based outside of the US. If it is an absolute condition to the investment that the investee entity be a US entity and the Irish startup is already trading, a way to facilitate the investment is to flip into a US company. This can be effected by a share for share exchange where the shareholders exchange their shares in the Irish company for shares/stock in a US corporation, more often than not a Delaware C-Corp. At its most straightforward, the shareholders end up holding stock in the US company (in the same proportions and carrying similar rights to their shares in the Irish company) and the Irish company becomes a wholly owned subsidiary of the US entity and continues to carry on business as before. Generally, the share for share exchange would be done just prior to completion of the US investment.
Other key considerations:
Employee share options: Are there existing options? Can or should these be terminated and replicated in the US company?
Change of control: Review existing contracts for any change of control provisions (e.g. a customers right to terminate the contract if there is a change of control in the company) which might be triggered on a change in the direct ownership of the company, even if the ultimate shareholders are not changing.
Additional consent requirements: Are there any third party consents which may be required – other investors, under grant agreements etc?
Tax & Legal Advice: Any flip into a US company or other reorganisation involving a US entity will require tax as well as legal advice from advisers on both sides of the Atlantic. While it may seem more complicated, the deal can be completed within the same period of time as if it was an all-Irish deal.
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NB: While all reasonable care has been taken in the preparation and completion of this article, no responsibility is accepted for any errors or omissions. This article has been prepared for information purposes only and does not constitute legal or other advice.