SENNA

European Startups Flock to the US in Search of Growth Capital

In a bid to access deeper pools of venture capital and higher valuations, a growing number of European and German startups are making the leap across the Atlantic to establish a foothold in the US market.

The decision to "relocate" to the US is often driven by a range of factors, chief among them the sheer size and importance of the US as a consumer market. But startup founders are also attracted by the broader base of investors, the easier access to further VC financing rounds, and the potential to eventually list on the prestigious Nasdaq exchange as an exit avenue. Many US investors also prefer startups to be structured as American legal entities and to have a physical presence stateside.

Since it's not possible to simply convert a German GmbH (the typical startup legal form) into a US corporation, startups are having to explore alternative structuring options. The so-called "US Flip" has emerged as a popular approach, according to industry sources.

The US Flip involves the startup's shareholders first establishing a US-based subsidiary, usually a Delaware corporation, that becomes the new parent company. They then contribute their stakes in the German GmbH to the US entity in exchange for shares, allowing the original German company to continue operating as a subsidiary.

"This structure provides a legally robust way to preserve existing contracts and makes future funding rounds easier to execute," explained one lawyer familiar with the process.

As part of the US Flip, the startup also aligns its governance model with US venture capital norms, adopting frameworks laid out by the National Venture Capital Association. This enables the use of instruments like preferred stock and employee stock option programs that are common in the American startup ecosystem.

Other options, such as transferring assets or IP rights to a new US entity, are seen as less attractive due to the tax implications of revealing hidden reserves.

The strategic rationale behind these corporate reshuffles is clear - European founders are seeking to supercharge their growth by tapping into the deeper pockets and higher valuations of US investors. And with the Nasdaq beckoning as a potential exit route, the transatlantic migration shows no signs of slowing.

"The US market is just too big to ignore, especially for startups looking to scale rapidly," said one venture capitalist who has backed several companies making the move. "These structural changes give them the best chance of succeeding on the other side of the pond."