A founder call rarely tackles the question of company location directly. More often than not, the assumption goes largely unexamined. Delaware, the default, and the call proceeds. That assumption had been relatively safe for about a decade. For good reasons, really. That ground has been shifting. For the early movers, the risk of losing money to lawyers for a, now, more compelling reason, has been largely avoided.
Why the Overseas Holding Company Became the Default
Global investors loved Delaware, and for good reason. A founder needing a fast round of investment could hit the ground running, while the investor had all of the negotiating and funding conveniences available. The eventual exit was usually planned for a listing down under. Drafting a plan to place the parent company of the subsidiary in the U.S. usually meant looking down the road a good bit.
All the pieces fit. Banking access, dollar revenue, and a business built on clean contracts with customers in the global marketplace meant that for a legal entity primarily selling overseas and making its round of investments primarily in the overseas markets the business was closed.
What Has Shifted
There are three major changes, all readily apparent in the numbers that drive business.
The revenue base is telling a new story. More of these companies earn from and serve Indian customers and users. Therefore, the operational headquarters is in one country, and the legal parent is in a different country. That gap builds friction, which intensifies tax, compliance, and liquidity issues.
The exit map looks different. Indian public markets have advanced and matured, providing a new home for technology listings, which alters where companies are expected to be. Having a parent company in a foreign country for an overseas listing has been justified in the past, but when the expected exit is in India, the justification becomes misaligned.
The reverse has also been true, as a number of recognized companies have returned their domicile to India in prelude to an overseas listing. Every completed listing makes the journey clearer for the next potential listing. What used to be thought of as a theoretical option, now has live precedent, and precedent alters how the board approaches the question.
The Hidden Cost
Establishing a foreign holding company is quick and inexpensive. The opposite process is painfully slow and costly. Moving equity across international borders deems legal evaluations and tax consequences, in addition to months of legal work at a time when a company needs its focus elsewhere. The important advice to continue to remind founders is simple. Something that can be decided in a week can take a year to reverse. The cost to reverse is proportional to the value. A restructure that was minor at the initial fundraising stage becomes a major cost. By the time of the Series B round, the founder has a company to run and a round to concurrently run.
The Parts Founders Feel First
Long before things get complicated, the founders’ perception is impacted first and foremost by cash. Multi-entity setups mean cash is located in numerous countries and usually the closest cash is not the most available. Many entities can collectively satisfy their financial obligations, but the cash needed to meet a single group member's payroll is lost in another country. The more countries involved the more demanding the compliance and more frequent legal filings. When the choice of company structure starts to impact the company as a concrete problem, caused by a vendor needing payment while cash waits in a foreign subsidiary, the founders will likely be the first to feel it.
How The Decision Is Made Well
The early stages of an effective structuring call stem from a select few precise and honest questions. At these stages, changes come at a much lower cost.
The first question deals with revenue. Clarity comes to the founder when they identify where money comes from today and where they expect it to come from in three years. The picture of the future exit is next, as the likely IPO leads to the likely parent company.
The source of funding comes next. The investors of the next two rounds often shape the answer to the question. Finally, cost and timing are brought in. An early Flip is a cost a founder can plan for, while a Flip that is early vs late is a founder’s worst nightmare. When addressed, these four questions can help a founder present a defendable view in a board meeting.
Closing Thought
The structure is the bet on where the firm will spend the bulk of its life. The placement of the parent company is a statement about the company and the founder and the market the founder believes the company will have.
The founders who treat that choice as a long-term strategy and revise it as intent and the company grows, have the exponentially superior advantage over their competition to those who manage the choice as paperwork. They compete with a growing disadvantage.
The question you should ask founders with this experience is, at what point did the home you chose on day one start to influence the decisions you made one, three, five, or more years later?