Many Latin American startups start their lives as Delaware C Corps on the advice on US VCs or Latin American lawyers. It’s the path of least resistance, and for some startups, it’s the right structure. If you want more background on legal structures for Latin American startups, check out the long post that covers the pros and cons of different types of entities.
If you start with a C Corp and realize that you are unlikely to be bought by a US company, you may want to try to restructure your company using what’s called a Freeze. A freeze creates a parallel structure with usually a Cayman holding company alongside your C Corp and “freezes” the value of your C Corp at today’s valuation so that you only pay Corporate Tax on the portion of the value created while you were a C Corp.
These freezes are extremely complex and expensive, and can cost upwards of $250,000 to structure, and then can cost $1,000,000+ to analyze at exit. They can take months to structure and months to close at exit, and they may not have been done correctly, which could make them moot anyway. They can increase complexity around figuring out ownership and create unintended consequences on liquidation preferences. There are some top tier US VCs that have invested in companies that have a freeze structure, but it adds even more complexity than is needed and most founders would likely want to avoid them if possible.
You can avoid these freeze structures and all of their complexity three ways:
- If you don’t have a C Corp, don’t create one.
- If you have a C Corp, you can bite the bullet and pay the double tax when you exit
- If you are still really early, you may be able to pay the Delaware exit tax and restructure. I haven’t seen a company pay the tax on paper profit yet, but if it is less than $100k and you’re raising more than $1M, it can be a good idea at an early stage.
For more information on different corporate structures for Latin American startups, check out our Latin America Startup Structure guide.
To be clear, this is not legal advice. You should always work with a lawyer when thinking about corporate structures. The money you’ll spend getting good advice will save hundreds of thousands or even hundreds of millions of dollars down the road. I can’t stress this enough. Don’t just follow these guidelines. Your situation is unique. Talk to an experienced lawyer.