1. introduction

Since the 2010s, it has become common for American venture funds to invest in European companies. Some of these venture funds function as accelerator programs, through which the company undergoes a process at the fund, typically ending with a pitch to a large number of potential investors (e.g. Demo Day). Examples of these types of venture funds are Y Combinator (YC), Alchemist Accelerator, 500 Startups, Angelpad, etc.

The funds make a large number of investments in companies around the world each year, and their investments usually follow a fixed model. For example, YC invests $500,000 in each company, of which $125,000 is structured as a SAFE, through which YC acquires 7% of the company. The other $375,000 is structured as an uncapped SAFE with a so-called Most Favored Nation clause.

The venture funds' investment is also conditional on the investment being made in a US company, which is usually domiciled in Delaware. This means that the Danish company must "convert" its Danish limited liability company into a US company. This process is often referred to as a Delaware Flip.

2. What is a Delaware Flip?

A Delaware Flip means that a US company is "interposed" between the Danish operating company and the shareholders. This allows YC and the other funds to own shares directly in a US company.

There are different legal methods to complete the flip. However, the most commonly used method is that the American company is formed by contributing the shareholders' shares in the Danish company (capital swap). This means that the shareholders have "exchanged" their shares in the Danish company for shares in the US company. The US company is then placed between the shareholders and the Danish company.

The process can be illustrated as follows:

Before the flip                                                                      

After the flip

‍3. What causes a Delaware Flip?

A venture fund like YC invests in hundreds of companies every year. They therefore want their investment process to be as streamlined as possible. For this reason, Delaware Flipped requires venture funds to invest in a form of company whose corporate and tax law the fund is familiar with.

It will complicate the process for them if they have to familiarize themselves with the laws of each jurisdiction they invest in, and it will usually also require the involvement of external lawyers.

While the operational activities will most often continue in the Danish company, the investors' direct ownership will thus be in the American company.

4. What should you be aware of when doing a Delaware Flip?

If the company has external investors, it is important that they are involved from the start. Their involvement is necessary for the flip to be completed. This is partly because they must accept that their ownership will be placed in a US company in the future, but also because they must accept that any ownership agreement in the Danish company will be terminated.

Although the legal process for a Delaware Flip is relatively simple, it is paper-heavy and requires the involvement of advisors from both Denmark and the US. However, it is a process that should only require limited client involvement.

In addition, the company typically works with a relatively short time frame from being admitted to the fund's accelerator program until the investment is made and the flip must be completed.

The most important thing for the company is therefore to appoint advisors who have experience in performing a Delaware Flip. For the Danish advisor, it must be someone who can actually guide the company's investors through the process and who may already have a relationship with Y Combinator's lawyers.

Venture funds usually have a list of US law firms that they work with. These firms usually offer to defer payment of part of their fees until the company's next investment round.

5. Get in touch with us

Are you facing an upcoming Delaware Flip or want to learn more about the process? Then we at Samar Law are at your disposal. Please contact us via 60793777 or payam@samarlaw.dk.