
Ask HN: Why does a potential investor want us to reincorporate in the Caymans? - caymanman
My startup is negotiating terms with a foreign investor and they&#x27;re asking us to restructure our company so that we&#x27;re based in the Caymans and our US operations are a subsidy.  The ostensible reason is some tax benefit, but neither we nor our counsel can imagine what that might be.  Have any of you experienced this? I&#x27;m looking for an insight into their reasoning.
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philiphodgen
I'm an international tax lawyer and I sense a normal foreign investor trying
to do normal tax planning.

One quick example: your foreign investor buys shares in your Delaware
corporation and hits the big time. The foreign investor dies before selling
out. Shazam. 40% estate tax. In contrast, your foreign investor owns shares of
a Cayman corporation that owns that Delaware corporation. Same big time. Same
death. No estate tax.

Second normal tax planning move. Go ask Mr Google about corporate inversions.
Go on. I'll wait.

Ok. You're back.

Guess what? Your company started life as a foreign company and will never need
to go through an inversion -- because it is already a foreign corporation.

Bullet dodged.

I could go on, but I'm going to go get some frozen yogurt.

Happy weekend to you.

~~~
rahimnathwani
I'm not saying there aren't other advantages for OP's company, but the example
you gave (avoiding estate tax) can be achieved by the investor without the OP
changing the corporate structure.

The investor could just have their own Cayman company, and have that company
invest in OP's Delaware corp.

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philiphodgen
I think that is exactly what the OP was suggesting. Cayman holding company
with US operating subsidiary.

~~~
MichaelBurge
I think the confusion here is whether the existing US shareholders would own
shares in the Cayman company or the US company. Some are talking about the
former, and some are talking about the latter.

Why would the existing shareholders want to move their shares to the Cayman
company?

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philiphodgen
The existing shareholders would like to own Cayman shares because of future
corporate inversions.

There may also be questions of "which entity should own the IP?" If the
shareholders own holding company stock they are assured of ownership of IP
even if the IP is parked in a separate corporation.

Then you look at the exit. If this company is ever sold, what exactly will be
sold? If you are a shareholder you do not want to be left behind with an
orphaned element of the business. Owning stock at the top tier helps avoid
this.

OTOH if this is a "keep it forever and milk the cash flow" business, you have
to think through the tax outcomes there too.

U.S. shareholders in foreign corporations are punished by the IRS TaxBot for
their impudence. The paperwork and accounting cost overhead are daunting. That
is a significant reason to avoid a structure such as this.

It ain't easy. Startups don't usually have the cash to get the thinking done
correctly at the front end. So later on they are boxed in -- change may
trigger massive tax costs that are unacceptable. IP ownership and exploitation
is a major offender here.

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jtfairbank
You want to keep your corporate structure as standard as possible. Anything
out of the ordinary will scare off future investors, since it results in more
risk. This one investor is probably not worth losing a seed or A round in the
future. And the VC's lawyers definitely will find anything non-standard.

The standard (as I know it based on my experience in YC) is to incorporate in
Delaware as a C-Corp, with a 4 year vesting period and 1 year cliff for the
founders. Here's why:

\- Delaware has a TON of registered corporations, and thus a lot of existing
case law which means there are less unknowns when it comes to tricky
situations. I think their laws also make it easier for the company to operate
in other states, and there may be tax benefits (not 100% sure about that).

\- C-Corps have shares and are structured to allow for outside non-involved
investors, and protect these investors from corporate taxes. LLC's and
partnerships make it harder to invest, and tax each person for the companies
profit's instead of the company itself.

\- The 4 year vesting w/ a 1 year cliff incentivises founders to put in enough
time to see the company through and protect the company / investors if it
doesn't work out with a founder. The same applies to employee stock / option
grants down the road. This is probably the most flexible one, and there is a
lot of innovative companies that are trying out alternatives. Example 1: 6
year vesting w/ a 2 year cliff but larger overall equity grants to employees.
Example 2: triggering the start of vesting for founders only after a milestone
has been reached, such as ramen profitability or raising a seed round. This
protects very early stage companies that will often need 1-2 years to figure
out how to get on that breakout trajectory.

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CyberFonic
I'm neither a lawyer nor an accountant. But I can smell that something is off.
I don't wish to appear discriminatory, so I won't ask which country your
foreign investors are from. But you need to do your research into them and
similar investors. Just saying.

If your counsel can't tell you, then they are not very well informed. Haven't
you read about the Panama Papers? That is just one of many tax havens. But it
is more than just tax management. Using off-shore companies is used for all
sorts of "frowned upon" activities.

You need to be aware that the IRS requires significant amounts of
documentation etc - which could affect you as founders and shareholders. Other
government agencies are also very interested in such off-shore arrangements.

As good as HN is for feedback. You really need competent attorneys and
accountants to advise you.

~~~
SmellTheGlove
It doesn't have to be nefarious. OP said it's a foreign investor. A foreign
investor probably wants to avoid as much US bureaucracy and taxation as
possible. Forming offshore with the US entity as a subsidiary allows the
foreign investor to own shares of a non-US entity.

The real question for me governing law, and the potential to have to appear in
the Caymans if there's a dispute. Maybe it's because I am a lawyer, but I'd
rather go to court in Delaware than somewhere outside of the US, but this
isn't really my area of knowledge. An attorney more versed in this would have
more knowledge about the foreign forum and whether it presents a risk in
potential litigation.

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auganov
Perhaps they don't want the US-bound money transfer to relate to their Cayman
entity. I wouldn't worry about the source of the money and whatnot. Asking for
that kind of a concession shows they're not a sophisticated startup investor.
And have little respect for the founders especially given the lack of a
reasonable explanation. Don't want that kind of people on board. Hey, unless
the venture you're doing is a startup incubator and they're giving you 1B$+ to
invest in other companies, in which case they would indeed be sophisticated
;--)

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mdotk
Why do you need to imagine? Just ask for their reasons and the tax advice
letter they probably have from their accountants/lawyers.

