One quick example: your foreign investor buys shares in your Delaware corporation and hits the big time. The foreign investor dies before selling out. Shazam. 40% estate tax. In contrast, your foreign investor owns shares of a Cayman corporation that owns that Delaware corporation. Same big time. Same death. No estate tax.
Second normal tax planning move. Go ask Mr Google about corporate inversions. Go on. I'll wait.
Ok. You're back.
Guess what? Your company started life as a foreign company and will never need to go through an inversion -- because it is already a foreign corporation.
Bullet dodged.
I could go on, but I'm going to go get some frozen yogurt.
Happy weekend to you.
The investor could just have their own Cayman company, and have that company invest in OP's Delaware corp.
Why would the existing shareholders want to move their shares to the Cayman company?
There may also be questions of "which entity should own the IP?" If the shareholders own holding company stock they are assured of ownership of IP even if the IP is parked in a separate corporation.
Then you look at the exit. If this company is ever sold, what exactly will be sold? If you are a shareholder you do not want to be left behind with an orphaned element of the business. Owning stock at the top tier helps avoid this.
OTOH if this is a "keep it forever and milk the cash flow" business, you have to think through the tax outcomes there too.
U.S. shareholders in foreign corporations are punished by the IRS TaxBot for their impudence. The paperwork and accounting cost overhead are daunting. That is a significant reason to avoid a structure such as this.
It ain't easy. Startups don't usually have the cash to get the thinking done correctly at the front end. So later on they are boxed in -- change may trigger massive tax costs that are unacceptable. IP ownership and exploitation is a major offender here.
This has the same effect on the new investor's estate tax as changing the corporate structure. So it's not worth if that's the only reason.
The standard (as I know it based on my experience in YC) is to incorporate in Delaware as a C-Corp, with a 4 year vesting period and 1 year cliff for the founders. Here's why:
- Delaware has a TON of registered corporations, and thus a lot of existing case law which means there are less unknowns when it comes to tricky situations. I think their laws also make it easier for the company to operate in other states, and there may be tax benefits (not 100% sure about that).
- C-Corps have shares and are structured to allow for outside non-involved investors, and protect these investors from corporate taxes. LLC's and partnerships make it harder to invest, and tax each person for the companies profit's instead of the company itself.
- The 4 year vesting w/ a 1 year cliff incentivises founders to put in enough time to see the company through and protect the company / investors if it doesn't work out with a founder. The same applies to employee stock / option grants down the road. This is probably the most flexible one, and there is a lot of innovative companies that are trying out alternatives. Example 1: 6 year vesting w/ a 2 year cliff but larger overall equity grants to employees. Example 2: triggering the start of vesting for founders only after a milestone has been reached, such as ramen profitability or raising a seed round. This protects very early stage companies that will often need 1-2 years to figure out how to get on that breakout trajectory.
If your counsel can't tell you, then they are not very well informed. Haven't you read about the Panama Papers? That is just one of many tax havens. But it is more than just tax management. Using off-shore companies is used for all sorts of "frowned upon" activities.
You need to be aware that the IRS requires significant amounts of documentation etc - which could affect you as founders and shareholders. Other government agencies are also very interested in such off-shore arrangements.
As good as HN is for feedback. You really need competent attorneys and accountants to advise you.
The real question for me governing law, and the potential to have to appear in the Caymans if there's a dispute. Maybe it's because I am a lawyer, but I'd rather go to court in Delaware than somewhere outside of the US, but this isn't really my area of knowledge. An attorney more versed in this would have more knowledge about the foreign forum and whether it presents a risk in potential litigation.