What’s an inversion?
An inversion is the act of re-incorporating a business overseas and is completed for many reasons.
Established companies may invert into a foreign country to lower their operating costs. At the other end of the scale, early stage companies invert to improve operations and investment prospects in the U.S. This was exactly the case for Glassjar.
Glassjar was originally incorporated in New Zealand, however, as we expanded our focus to the U.S. market we quickly needed a domestic entity for bank accounts, structuring partnerships etc.. Yet it wasn’t until we began capital raising that it became clear that this would need to be the parent company.
Early stage U.S. investors want a standard U.S. company structure that they know and understand. Without it, a company presents a potentially complicated, confusing deal and one that much easier for them to pass on.
As they have the money, it’s was worth aligning to their preferences. But how?
In essence an inversion occurs through creating a foreign entity, having that entity buy the original company, then migrating the shareholders to the new company. But that is high level so I’ve drawn out the below to give you more detail on how our particular example unfolded.
The legal process
The first step is to create the foreign entity, in our case, the incorporation of Glassjar Software, Inc. as a Delaware C-Corp.
There are two crucial steps in the incorporation process. The first is to incorporate as a Delaware C-Corp which is by far the most common entity type (here’s why). The second is to use standard documents (Bylaws etc.) such as those used by Y-Combinator or 500 Startups. As these documents are used by hundreds of startups each year, nearly every U.S. investor is familiar with them. As the goal of the inversion is to end up with a company that looks and feels like a U.S. born company this is one of the times it pays not to be different.
With the C-Corp established you now need people to own it. To do so, we executed a share-exchange agreement that allowed our shareholders to exchange their New Zealand shares for a proportional number of Glassjar U.S. shares. We then required each shareholder to sign resolutions approving the inversion and an individual transfer form with the U.S. entity, which formally transferred the shares. Once each of these individual agreements were signed, the inversion was complete. All that was left was updating the NZ company records and issuing new U.S. company share certificates.
What happens to the original entity?
The choice is yours.
In our case, we’ve kept Glassjar NZ operational. This allows us to continue employing New Zealanders and to try sponsor visas to the U.S.. It also allows the business to keep costs down by leveraging cheaper operating costs in New Zealand.
The relationship between Glassjar U.S. and Glassjar NZ is governed by a formal agreement which ensures, above else, that a fair price is paid for the services provided by each entity.
What happens to the IP?
We have kept all existing IP (i.e. the original New Zealand site) frozen at the New Zealand level as it was immaterial to our U.S. operations. Moving forward all our IP is created for/by, and owned by, Glassjar U.S.. With this, we have pushed to create a clear distinction between any work conducted pre vs. post inversion.
Tax planning can be worthwhile
Although in some cases the inversion itself will not create a taxable event in New Zealand or the U.S., the taxation of future profits from the U.S. is likely to be very different from what New Zealand investors may expect, particularly if the majority of shareholders are NZ tax residents. For example, New Zealand tax may be payable on the ownership of U.S. company shares even if the New Zealand shareholders have not actually received any dividends or other profits from those shares.
As this area can be quite tricky and the tax implications can vary depending on your circumstances, it is useful to obtain proper advice to get a bearing on the potential tax implications so that you can plan ahead.
When to complete an inversion?
Get on to this process as soon as you are serious about the U.S. market. The general consensus* I received was that it is better to invert sooner rather than later. This is as the company structure will be cleaner and the operations easier to shift. Furthermore the process will take at least a month and your shareholders will want to be well informed before that.
*I spoke with 6 lawyers (4 in the U.S. and 2 in New Zealand), 2 accountancy firms, investors and entrepreneurs.
What does it cost?
You will want to include at least $15K in your budget but note that I’ve spoken to companies who have paid up to $80K. In essence this is all in legal and accounting fees.
As every company is different, there are a lot of nuances that need to be addressed. For us, the legal set up was relatively straightforward and our lawyers were awesome. Instead the main implications (and thus costs) arose from resolving tax complications at the New Zealand level.
Where to go?
If you want some broad and unqualified advice around this feel free to reach out and I’ll do my best to answer. Though take it and this entire blog post with a grain of salt as I’m not a lawyer.
The one bit of advice that I am qualified to say though is go with Buddle Findlay. They handled the NZ side of the legal process for us and are absolutely awesome!
Post originally by George Smith