Benefits of US incorporation for European businesses
European founders often register their startups in the U.S., particularly as Delaware corporations, either from inception or when ready to raise Series A or Series B funding. This article discusses why the idea of incorporating in the U.S. is becoming increasingly attractive for European startup founders.
Greater access to capital and the financial backbone of a U.S. registration
Access to capital acts as the lifeblood of any startup, and the United States unsurprisingly straddles the global venture capital market with unrivaled dominance. In fact, the availability of funding in the U.S. overshadows the entire European continent by threefold, paving a more concrete path for startups to flourish.
A startup, particularly one registered in the U.S., can tap into the robust ecosystem of American venture capital funds and proactive angel investors who play significant roles in nourishing aspiring ventures.
American investors hold a strong bias towards U.S.-registered corporations, with a special affinity for those based out of Delaware. This is primarily rooted in their comfort and familiarity with the legal structures, financial practices, and business transparency offered by these U.S. entities.
The U.S. regulatory framework offers clarity and lucidity, ensuring a harmonic investment process. Further, tax restrictions often discourage American investors from injecting capital into foreign entities, compelling them to focus their resources within their home territory.
Comparatively, Europe lags in providing a mature venture capital market. Beyond established tech hubs like London, the venture capital scene across the broader European landscape is still in a state of budding infancy.
Access to pre-seed and seed capital is feasible across most European countries, but there's a stark shortage of Series A and growth stage capital. Entrepreneurial success stories like Portugal's Outsystems and Unbabel have underscored the benefits of incorporating a business in the U.S.
These European startups found fertile financial grounds by transplanting their corporate roots to the U.S., allowing them access to the much-needed growth stage capital.
Hence, incorporating the startup in the U.S. offers a tangible benefit of not only securing funds when a startup is taking flight but also when it's ready to soar.
The U.S. market offers a significantly higher potential for startups to raise venture capital, providing them with a stronger financial backbone and a chance for accelerated growth.
Facilitated acquisition and investment through U.S. registration
Registration in the U.S. simplifies the acquisition process, creating an ecosystem that is more appealing and approachable for potential buyers. This is especially beneficial when dealing with due diligence—a thorough audit of a business before its sale or fundraise, which is fundamental during a potential acquisition or investment.
United Kingdom-registered companies, for example, already enjoy a certain level of compatibility, inheriting the benefits of a shared common law system with the U.S. This shared legal perspective leads to a sense of familiarity and eases the investment/acquisition process.
In contrast, in civil law jurisdictions, the pathway to acquisition can be incredibly cumbersome. Take the example of a SaaS startup based in Germany. Potential investors and buyers are often confronted with complex legal procedures, sometimes involving court sessions that can extend over a full day. Such processes slow down the acquisition/investment speed and can deter potential buyers due to its intricacies and inefficiencies.
Consequently, by opting for U.S. registration, startups present themselves as simpler investment targets. They bypass these hurdles and potentially daunting legal complexities, which is especially crucial for smaller startups considering their exit strategies with potential limitations in resources. Registering your company in the U.S. paves the way for smoother exit strategies, significantly reducing any potential complications and generating a more streamlined, efficient process.
Favorable business environment: a U.S. advantage
The United States has cultivated a reputation for cultivating a business-friendly environment that nurtures new company creation. The nation's ecosystem offers a myriad of incentives and harbors manageable tax structures designed to foster business growth and innovation.
One such advantageous tax provision present in the U.S. is the QSBS (Qualified Small Business Stock) exemption.
This exemption plays an instrumental role in counteracting the relatively high capital gains tax rates prevalent across many European nations.
It presents a valuable gift to founders, delivering substantial financial leeway and enabling them to claim up to $10 million in tax as tax-exempt during the sale of their companies. This favorable tax law radically minimizes the tax burden on the sale, making the U.S. more appealing for startups.
By contrast, the European Union presents a more tangled landscape for startups, especially in the realm of compliance and taxation pertaining to digital goods trade. The E.U., though marketed as a unified marketplace, essentially operates as a tariff-free trading zone comprising 27 different nations.
Each of these nations brings along its own unique set of taxation policies and business activity regulations. Consequently, instead of operating within a consistent, homogenous market, founders find themselves navigating a labyrinth of differing rules and regulations.
Incorporating a startup in the U.S. offers a clear road map for entrepreneurs wishing to steer clear of complex tax infrastructures and stringent compliance rules. It promotes a nurturing environment that motivates new company creation and proactively supports startup growth.
Testimonials from European founders
Several European founders have shared their experiences and reasons for registering their startups in the U.S.:
"Deciding to incorporate in the U.S. was beneficial for us for a few reasons. Initially, providing stock options to employees of our Portuguese company proved challenging. We received advice from other founders about likely needing to incorporate in the U.S. if we were considering US-based funding. Plus, tools like Stripe, more focused on serving American companies, were more accessible to us," reveals João Batalha, CEO and Co-Founder of Amplemarket.
Concurring, Luke Dzierzek, CEO and Founder of Scored.ai, remarks, "The 'Delaware flip' was the next logical step for us after substantial R&D. This change boosted our confidence and tightened our focus on becoming a leading player in the U.S."
Jón Edvald, Founder and CEO of garden.io, opted for the immediate incorporation of his company as a Delaware C corporation to avoid the inevitable bureaucratic hurdles of a German entity.
Registering European startups in the U.S.
As the advantages of registering a European startup in the U.S. amass, our platform at Firstbase emerges as your go-to ally in transforming your European venture into a thriving Delaware corporation.
Firstbase is designed to provide you with the essential tools, capabilities, and guidance to efficiently incorporate your startup, manage equity issuance, fundraise, maintain your cap table, and adhere to compliance filings. Importantly, Firstbase creates an international founder-friendly environment with absolutely no restrictions or barriers for registration in Delaware.
There is no requirement for a U.S. mailing address, breaking down the traditional barriers to entry.
For those founders already possessing established entities but seeking to transfer their registrations to the U.S., a convenient process dubbed the "Delaware flip" may be the perfect fit. This strategy is particularly beneficial when considering the advantages that U.S.-registered corporations enjoy.
U.S. registration opens up a world of benefits for European startups. These unparalleled advantages include unprecedented access to capital, streamlined acquisition processes, and the fostering of a business-friendly environment.
European founders can maximize these benefits by either launching their startups as U.S.-registered entities or shifting their registration to the U.S. during pivotal fundraising stages, such as Series A or Series B capital raises.
Allow Firstbase to be your trusted partner in achieving your entrepreneurial vision. We are committed to simplifying the process and leveraging the advantages of a U.S. registration while positioning your startup for optimal success.