Why European startups register in the US

Many founders in Europe either start their company as a Delaware corporation from the get-go, or they move the company’s registration from their home jurisdiction to the US when they raise their Series A or Series B. In this article, we’ll explain why European founders don’t stay in their home jurisdictions in the first place and register their startups in Delaware.

There are three main reasons why European startups end up registering as Delaware corporations or moving the company registration over in a process known as the Delaware flip.

• Access to capital

The US is by far the largest market for VC funding in the entire world, more than 3x the entire continent of Europe. Most American VC funds and angel investors only invest in US-registered companies (and more specifically, usually only Delaware corporations). Not only are they more familiar with Delaware corporations and have the know-how to diligence the company’s corporate structure and finances, in some cases, the funds are precluded from investing in overseas entities for tax reasons.

The biggest drawback with trying to raise money in Europe is that most European countries, outside of tech hubs like London, do not have mature venture capital markets. In the majority of European markets, it is possible to raise pre-seed and seed capital, but there is a lack of series A funds and growth stage capital. For example, despite having an outsized number of unicorn startups for such a small country, Portugal got its first series A fund last year in 2021. The successful Portuguese startups like Outsystems and Unbabel all moved their companies abroad, usually to the US, in order to raise growth stage capital.

London may be the only city on the continent with a mature, developed venture ecosystem, and, despite this, many UK companies still opt to register in the US as Delaware corporations.

• Ease of acquisition

Most potential acquirers will find it way easier to diligence and complete the acquisition process for a US registered company than one registered in Europe. This is notably easier with UK registered companies since the US and the UK both share a common law system; however, the process is quite cumbersome in civil jurisdictions. I have a friend who acquired a German SaaS startup and, in order for the deal to go through, he had to sit in a German court while a notary read aloud the entire contract to him in a process that spanned more than one full day. While it might be worth the hassle for a 9-figure acquisition, most acquirers don’t want to go through this painful process, especially to acquire a smaller startup or to do an acquihire. If your startup doesn’t grow as planned, you will drastically limit your exit options by not registering your company in the US.

• Less bureaucratic red tape and a more business-friendly environment

While European countries pride themselves on their social safety nets, the US prides itself for having a business-friendly economy and incentivizes the creation of new companies through tax rules such as the QSBS exemption, whereby founders can potentially claim up to $10 million as tax exempt when selling their company.

By contrast, many European countries have extremely high capital gains tax rates, and European founders have to deal with a myriad of compliance and tax issues just to sell digital goods like software. In reality, the EU is not a common market – in practice, it is a tariff-free trade zone with 27 different sets of rules for taxation and business activity (although some laws are standardized at the European level, such as GDPR).

Here is an illustrative example: my friend Leaf Corcoran runs a marketplace for indie game developers called itch.io. He spent months figuring out how much sales tax needed to be charged for a game developer in European country A selling a game to European country B on his platform and there was no off-the-shelf product to calculate the game developer’s tax obligations for a sale.

João Batalha is the CEO and Co-Founder of Amplemarket, a YCombinator-backed startup that started out in Lisbon. He explains why he moved his startup to the US and the advantages of basing his company there:

Luke Dzierzek is the CEO and Founder of Scored.ai, a startup that is pioneering a new approach to music creation, collaboration and interactivity. Luke shares why he chose to do the Delaware flip and convert his company from a UK Limited Company to a Delaware corporation in 2021:

Jón Edvald is the founder and CEO of garden.io, an end-to-end cloud delivery platform that streamlines the process of building, deploying and testing software applications. Jón explains why he decided to incorporate his company as Delaware C Corporation straight away.

We covered how the process for registering your company in the US from overseas in detail in other articles on our blog.

If you are registering a new startup and want to create a Delaware corporation, well, you’re in the right place. You can use our platform to incorporate your startup, issue equity, raise funds from investors, manage your cap table and keep up with compliance filings. There are no restrictions for overseas founders to register their company in Delaware – you don’t even need a US mailing address.

If you have an existing entity in your home country and want to move the registration over to the US, you would complete a process known as the Delaware flip.

Essentially, you create a new Delaware corporation and your existing European entity would become a wholly owned subsidiary of the new US registered corporation. Going forward, when you issue equity or raise funds, you would use the Delaware corporation instead of the European entity. Read more about the Delaware flip.

It is easier to access capital in the US. Most investors only invest in Delaware corporations.

• It is easier to get your company acquired if you are registered as a Delaware corporation. Most of your potential acquirers are US based tech companies.
• The US is generally regarded as a much more business-friendly place to do business than the EU because of the lack of bureaucratic red tape and lower taxes
• European founders typically either register their company in the US to start out, or, alternately, move the company’s registration over when raising a series A or series B through a process known as the Delaware flip