UK to US:
What founders need to know about the Delaware Flip

Webinar Speakers

Matt Dangell: Director, Rise Accounting
Bill Cogan: Founder, Seven Legal

Thank you to all who signed up for our webinar and to those catching up afterwards this session focused on what founders need to know when considering a move from the UK to the US through a Delaware flip.

The discussion covered why the US is often an attractive next market, what a Delaware flip involves in practice and when it usually makes sense to go through the process. Matt and Bill also talked through the key tax and legal considerations, including SEIS and EIS implications and exit planning.

Read the key points from our speakers below:

Bill Cogan:

Why expand into the US?

The US is a massive market opportunity. It is one of the strongest B2B software markets in the world. If you are an early-stage SaaS tech business, it is a huge market.

Access to capital is a major driver. The US VC market is deeper across every stage and is number 1 globally. Statistically, companies with US capital on their cap table often exit at larger numbers.

The US also has a lower headline corporate tax rate of 21% rather than 25% in the UK. It is a strong signal of ambition as well. Many founders view cracking the US market as the gold standard.

A Delaware top company can also improve acquisition and exit potential, particularly for US buyers.

What is a Delaware Flip?

A Delaware flip is where you take your UK company with UK shareholders and swap the shares into a new US holding company.

You incorporate a US holding company and execute a share for share exchange. Your UK company becomes a subsidiary of the US top company and your UK shareholders become shareholders in the US company.

After the flip, future funding rounds and share issuances are typically done at the US holding company level.

Why Delaware?

Delaware is widely used because it has a very business friendly and well established legal system for corporate law. The US operates under a federal legal system alongside state based systems and rules can vary significantly from state to state.

Delaware has deliberately positioned itself as the preferred jurisdiction for corporations and venture backed businesses. Around 70% of FTSE 200 companies are incorporated in Delaware and at SME level the figure is even higher, with around 80 to 90% of new incorporations choosing Delaware.

This is due to its clear legal playbook covering company formation, share structures, board governance and director duties. As a result, there is a strong preference from US venture capital firms for companies to be incorporated in Delaware.

There has been some recent commentary around Texas becoming an alternative jurisdiction, particularly following high profile cases involving Delaware. However, Delaware responded quickly by updating its legislation within a matter of months to remain competitive. As with many US states, there is competition for businesses and Delaware remains the most stable and widely accepted option for venture backed companies.

When to consider a Delaware Flip?

This is a question we get often. I would not recommend doing a Delaware flip speculatively. It is a transaction, it is distracting and it incurs costs.

The most common trigger is a signed term sheet from a US investor that requires a Delaware flip as a condition of closing. If you are speaking with US investors and they do not invest into UK companies, you can usually make the flip a condition of the investment and complete it in around 4 to 8 weeks.

A typical pattern is to start in the UK, raise early funding using the UK ecosystem and then flip when you see strong US market traction or when a US term sheet requires it.

Founders often ask whether they should incorporate in Delaware from day one. In most cases, it is simpler to start in the UK. Two jurisdictions adds complexity. Every lawyer becomes two lawyers, every accountant becomes two accountants. It is usually easier to flip later if needed.

Matt Dangell:

Tax considerations and US operating reality

In the UK, we have one main tax authority. In the US you have federal tax, then state level taxes.

Federal income tax

Federal income tax is the equivalent of UK corporation tax. For C Corps, the federal rate is 21%. The key point is that it applies to global income, but I will explain how that interacts with UK profits shortly.

Delaware franchise tax

In the UK, Companies House fees are minimal after incorporation. In Delaware, there is an annual franchise tax, effectively a subscription to be incorporated there.

There are 2 calculation methods. One is based on the number of shares, which is often not suitable for startups. The other is based on assumed capitalisation and assets and is typically more cost effective. This often results in an annual cost of around 400- 800$, but in some cases it can rise significantly if calculated incorrectly.

State sales tax

Sales tax is the equivalent of VAT, but it works differently.

Only the end consumer pays sales tax. A wholesaler selling to a retailer generally does not charge it, but the retailer selling to the end consumer does. Each state has its own rate and registration requirements.

Registration triggers vary. It can be based on revenue in that state, or on transaction volume, for example 200 transactions, even if revenue is below the value threshold. Delaware has no sales tax, but most companies will sell into multiple states, so you need to monitor this properly.

State income tax

State income tax is based on profit in a particular state. You do not simply pay both state income tax and full federal tax on top. State tax is typically factored into the overall federal position, but rates and rules vary by state.

Payroll and healthcare

US payroll taxes are broadly comparable, typically 10 – 15% depending on salary. A key difference is healthcare. Companies are not legally required to offer healthcare if they have fewer than 50 employees, but if you want to hire competitively, you often need to offer healthcare plans. This can push the all in cost of employment significantly higher, often 25 – 40% on top of gross salary when payroll tax and benefits are combined. This should be reflected in forecasts and fundraising plans.

UK subsidiary profits and double taxation risk

If you retain a UK subsidiary as the trading entity and it remains profitable, it will continue to pay UK corporation tax, typically at 25%, depending on the UK rules that apply to your company.

Once profits are retained in the UK entity, you can keep them there or move funds to the US top company, depending on where you want to invest.

US tax law can require reporting of overseas profits, but the UK and US have a treaty and foreign tax credit mechanisms. In many cases, when UK corporation tax has already been paid, you do not pay additional US tax when moving profits to the US entity.

If funds move the other way, for example from US back into the UK as capital, this typically does not create tax issues. If funds are loaned, interest may create tax implications.

SEIS and EIS considerations

Can SEIS and EIS relief be retained after a company flip?

The good news is that it can be retained, but the process must be followed precisely, with the right documents and HMRC notifications.

This is typically done as a tax neutral share for share exchange. The documentation often includes a share exchange agreement, board resolutions, shareholder approvals and evidence that the UK company remains a trading company with a permanent establishment.

You also need to ensure the US cap table mirrors the UK structure. A pre notification is usually submitted to HMRC before the flip to obtain approval.

Importantly, this is a share exchange rather than a share sale, so there is generally no capital gains tax triggered at the point of the flip.

Bill Cogan:

Legal mechanics and structure post flip

From a legal structuring perspective, a big part is mirroring the UK share structure into the US structure. For example, ordinary shares in the UK map across to common stock in the US.

US venture term sheets can look similar to UK venture term sheets in substance, but the underlying documents differ. In the UK you might have a subscription agreement, shareholders agreement and articles. In the US, particularly using NVCA documentation, rights are often split across 5 or 6 documents.

In the US, early stage VCs frequently invest using SAFE notes. That is more common than in the UK, where ASAs are often used with constraints linked to SEIS and EIS. As companies progress to Series A, this usually shifts to a full equity round with preferred stock layered on top of common shares.

A legal point to be aware of is permanent establishment. The US top company needs a presence in the UK that is separate from the UK subsidiary. This is often evidenced via someone with signing authority in the UK, or an office space.

We are also often asked about IP. In most cases, IP stays in the UK to avoid triggering a disposal that HMRC might scrutinise. The group then uses intercompany agreements for the US company to use that IP.

Another key area is share options. If you have EMI options in the UK, you may need to cancel them and re issue options over the US top company shares. US employees often expect a stock option plan, so having an option plan in place early is important, especially if you plan to hire quickly.

Matt Dangell:

Exit tax considerations

Once the structure is in place, founders often ask what exit looks like. I will outline 2 scenarios.

Scenario 1: Founder stays UK resident

If you remain in the UK, a Delaware flip can affect UK founder reliefs.

In the UK, business asset disposal relief can apply if you hold more than 5% and hold shares for more than 2 years. After a flip, you no longer hold shares in a UK limited company. You hold shares in the US top company, so business asset disposal relief is not available in the same way.

A Section 162 incorporation relief is often used to defer capital gains until sale of the US top company. When you sell, you would typically pay UK capital gains tax. The rate may be higher than what you would have paid under business asset disposal relief.

The rationale for many founders is that US investment can drive higher valuations, potentially offsetting the higher tax rate.

Scenario 2: Founder moves to the US

If you become US tax resident, you may be eligible for QSBS relief, subject to conditions.

Key conditions typically include:

• The company is a C Corp
• You hold the shares for 5 or more years
• The business is actively trading
• At share issuance, the company has less than 50 million dollars of assets

If these conditions are met, QSBS can result in 0% federal capital gains tax up to 10 million dollars per person. Amounts above that threshold are typically taxed and with state taxes the overall capital gains rate can often land around the low 20% range.

Timing matters, particularly if you plan to return to the UK, because UK tax residency rules can still impact your position.

Bill Cogan:

Key Takeaways

First, make sure the strategic rationale is clear. Usually, that is either a US investor requiring it or a significant portion of revenue coming from the US.

Before starting, make sure your cap table is clean and you understand what consents are required. Ideally convertibles should convert before the flip where possible.

Review any grants you have raised. Some grants may require repayment if operations or IP move outside the UK.

Tax planning is critical for your investors and for you personally. It is straightforward but not easy and we strongly recommend professional advice across legal, tax and accounting.

We will open up for Q and A now.

Questions and Answers

1. Why can’t the US entity use the UK subsidiary’s office and governance as its permanent establishment?

Bill Cogan: Although the UK subsidiary and the US holding company are part of the same group, they are separate legal entities. Under tax rules, the US company must have its own permanent establishment in the UK, which cannot be satisfied solely through the UK subsidiary.

2. Who pays the legal, accounting and tax fees for a Delaware flip, and what are the typical costs?

Matt Dangell and Bill Cogan: These costs are typically paid by the company. While investors understand that part of the investment will cover professional fees, the Delaware flip itself is treated as a company transaction.

US investors are generally less aggressive than UK investors about pushing professional fees back onto founders, particularly at earlier stages.

Legal fees vary depending on the complexity of the cap table and whether convertibles are involved. As a general guide, legal costs often fall in the range of £15,000 to £25,000. Founders are advised not to complete a flip speculatively without a clear investment rationale.

3. If the company being flipped is not UK based, can you still assist with establishing and maintaining a Delaware company?

Matt Dangell: Yes. Support can be provided regardless of where the original company is based. Assistance is available for setting up and maintaining companies in Delaware and other US states.