Expanding internationally can be a game-changer for startups, but the process comes with unique challenges. Paul Barnes of Overe shared his experience on navigating the “Delaware Flip,” managing US tax complexities, and building the right legal and financial foundation to set a company up for success in the US.

Entering the US market is an exciting opportunity for many startups, offering new investment prospects and expansion potential. Paul Barnes from Overe IO highlighted the complexities of this process during a recent Cyber Runway: Scale session provided by the Department for Science, Innovation & Technology and hosted by Plexal, where I attended on behalf of Cyber Tzar, the Enterprise Supply Chain Risk Management platform. In his session, Paul discussed the complexities of the “Delaware Flip,” the unforeseen legal and tax challenges of setting up a US entity, and the importance of building a strong, knowledgeable advisory team to guide the way. His insights are essential for any founder considering international expansion.

Contents

International Expansion Expert Session with Paul Barnes

These videos are publicly available on the Plexal YouTube playlist for the Cyber Runway programme.

Part 1

Part 2

Key Insights and Findings

Here are the key findings, insights, and advice from the Cyber Runway Scale session “International Expansion Expert Session with Paul Barnes” (Part 1 and Part 2). These insights provide a roadmap for startups considering international expansion, especially those targeting the US market for investment and growth opportunities.

US Incorporation Challenges

• Many US investors prefer to fund US entities rather than UK-based companies, prompting the need for startups to set up US operations for more accessible investment opportunities.
• Incorporating directly in the US from the start could have saved time and resources compared to the complexities of later converting a UK entity to a US-based one.

Complexities of the “Delaware Flip”

• Paul’s company was initially incorporated in the UK but later underwent a Delaware flip to facilitate US-based investment. The process required detailed legal paperwork and navigating complex tax requirements.
• Managing two legal firms (one in the UK and one in the US) added difficulty, creating a need for clear communication and meticulous project management to avoid errors or delays.

Financial and Legal Costs

• Paul highlighted the unexpectedly high costs associated with IP valuation and other incorporation needs, initially quoted at £14,000. By consulting with experts like CARTA and other CPAs, they found alternative, cost-effective solutions.
• The fee structures of US-based lawyers, often billed by minute increments, significantly increased legal expenses, contrasting with UK firms that tend to work on a project basis.

Tax Compliance and Additional Fees

• Operating a US entity requires handling numerous federal, state, and local tax filings, including unexpected fees like the San Francisco “phone tax” for virtual office numbers.

Leveraging SAFE Notes for Fundraising

• Using SAFE (Simple Agreement for Future Equity) notes allowed Paul’s company to collect investment incrementally, providing flexible fundraising options.
• SAFE notes were well received by Angel investors, facilitating quick funding without complex negotiations or valuation debates.

Insights

• Value of Quality Legal and Financial Advisors:
  • Engaging knowledgeable lawyers and accountants familiar with US-UK corporate structures proved essential. Despite the high costs, quality advisors helped Paul’s team avoid costly mistakes and delays.
• Importance of a Clear Expansion Strategy:
  • Expansion to the US should be based on both funding needs and strategic alignment with long-term goals. For cybersecurity companies, a US presence aligns with common exit paths and growth potential, given the US focus on technology acquisitions.
• Managing a Dual-Country Structure:
  • Operating with a UK subsidiary under a US parent company requires clear asset transfer agreements and tax compliance processes. This structure allowed Paul’s company to remain operational in the UK while catering to US investor preferences.

Advice

1. Consider Incorporating in the US Early:
   • For startups targeting US-based investors or looking to scale quickly, incorporating in the US from the start can save costs and reduce restructuring complexities later.
2. Beware of Costly Legal Pitfalls:
   • Avoid taking shortcuts when setting up shareholding or legal structures, as early mistakes can lead to significant costs. Proper documentation, board approvals, and experienced legal support are crucial.
3. Balance Focus Between Product Development and Administrative Tasks:
   • Shield the core team from administrative burdens to maintain focus on product and customer growth. Project-managing the expansion process can be a significant, time-intensive responsibility.

Conclusion

Navigating the US expansion process is complex, but as Paul Barnes illustrated, the rewards can make it worthwhile. His experiences emphasize the need for startups to plan strategically, invest in reliable legal and financial support, and consider incorporating in the US early to streamline future growth. For startups with their sights on the US, Paul’s lessons provide a valuable roadmap to avoid common mistakes and make the most of international expansion opportunities.