To Flip or Not To Flip
Why, when, the pros and cons of flipping
Startups, at some time in their growth path, contemplate flipping their structure to overseas jurisdictions. In many cases, it is an afterthought and is done with haste due to customer or Investor pressure. The implications of such a move are not well understood by many Founders. It is important that the flipping entity is done with a well-thought framework and executed considering all the pros and cons.
Why do startups evaluate such an option? Some common theses are as follows:
- Favorable Tax norms in Overseas markets.
- Easier and less taxing Listing norms.
- Ability to attract Overseas Investors.
- Possible ease of attracting Overseas customers.
As per our recent survey of startup entrepreneurs, 47% of the respondents said that they think of flipping to get more investment avenues. Here are the survey results for the question “Why are Indian startups flipping entity?”
When should flipping be considered as a potential option? What should be some key considerations?
- Company is at an early stage and not much value has been created, in terms of IP.
- If flipping is done later, the implications of Tax and other costs associated with transfer of IP and customer contracts should be carefully thought through.
What are some of the key considerations when you launch the process of flipping your startup?
- You flip your startup to a market where your key customers are and not to a market which is lowest in Tax and provides incentives.
- You flip your startup to a market where the Founders are willing to relocate.
- Look for a country with whom India has a Tax treaty.
Pros and Cons
What are some of the Pros and Cons with such a move?
- For B2B focused, tech product/SAAS companies, US & EU will be the largest market, hence being incorporated there will be a positive in the mind of customers.
- Enterprises in the western world are more sophisticated technology buyers. So, pilots are time bound, specific exit criteria will be pre-determined before pilots start, minimal scope creep etc.
- Valuations and ticket sizes are higher both for fund raising and Listing.
- Regulations are easier, more business friendly; tax rates are likely to be lower than India; Government support and grants could be availed.
- Embassies of countries like Singapore, Canada etc. are incredibly supportive of businesses wanting to be based in their countries. Currency fluctuation risks for Overseas Investors are mitigated.
What you need to be conscious of
- At least one member of the management team, ideally someone with Sales experience, should be willing to relocate to that country.
- Cost of talent is higher.
- Indian regulations around overseas remittances for seed capital from the Founders are complex. Indian regulations against round-tripping are exceedingly difficult.
- Attracting Overseas Investors in an unknown market will not be easy.
- Ongoing effort and costs for compliance and Governance to meet local regulations.
- Tax implications of transferring the IP from the Indian entity to the overseas entity.
Food for Thought
- Founders need to evaluate the pros and cons of having an international HQ, contextual to their business, before starting the company.
- If the company has already been set up in India, product development is already underway / completed etc., flipping the structure has many complications. Indian laws around this are very onerous. Any mistakes can be expensive and difficult to remedy.
- Do not attempt this because other startups are doing this, or a reputed Tax Consultant has advised you to do this.
- This is not a panacea for your growth issues or Capital raising.
My advice to Founders would be to think ahead, think objectively and do what is right for your business and customers.