New developments in structuring investments in and expansion of startups (2023)

Tuesday 5 December 2023

Report on a session at the annual IBA ‘The New Era of Taxation Conference’ in Rio de Janeiro
Friday 22 September 2023

Session Chairs
Mariana Eguiarte-Morett, Sánchez Devanny, Mexico City
Heather Ripley, Alston & Bird, New York

Rodolfo Araújo, iFood, São Paulo
Ana Carolina Carpinetti, Pinheiro Neto Advogados, São Paulo
Maria Mercedes Hoyos, DiDi, Bogota
Barry McGettrick, Matheson, Dublin
Luis Suárez de Centi, Uría Menéndez, Madrid

Lis Aguileira, Brigagão, Duque Estrada Advogados, Rio de Janeiro


The panel addressed the main developments in fiscal planning concerning startup investments, focusing on the tax implications arising from various investment structures. The challenges and innovative solutions to these challenges were also part of the discourse. The complex relationship between taxation policy, investment growth and startup expansion was analysed, providing valuable insights for investors, entrepreneurs and tax law practitioners. This report summarises the key points discussed.

Panel discussion

The panel discussion, diving deep into the lifecycle of startups, was structured as three key phases: the initial formation and funding of startups, their operational growth and potential restructuring, and the eventual transition to an initial public offering (IPO) or other exit strategies. Additionally, pertinent issues were discussed related to founder compensation and worker classification, which have a significant bearing on a startup's journey.

In the initial phase of the discussion, the focus was on the formation, structure and funding strategies for startups. The debate around the choice of business entity – be it a corporate structure or a pass-through business – took centre stage. This was closely followed by a discussion on the optimal exit strategies. When it came to funding, there was an exploration of the benefits and drawbacks of equity versus debt financing. Special financial instruments, such as simple agreements for future equity (SAFEs) and convertible notes, were highlighted for their unique role in startup financing. Lastly, the panel touched on various tax incentives available to startups, particularly those related to intellectual property rights, exemplified by tools such as the patent box and foreign-derived intangible income (FDII).

Transitioning to the second phase, the focus of the discussion then shifted to the operational growth trajectory and potential corporate restructuring scenarios. The concept of ‘flips’ or corporate restructuring was thoroughly discussed, highlighting the associated tax implications, including the challenges posed by realisation without actual cash flow. The treatment in this regard in both the target and investor jurisdictions was also examined, addressing factors such as the place of management/tax residence and the intricacies of the treaty network. Additionally, this phase shed light on various operational tax incentives available to burgeoning companies.

Delving into investment structures, the ‘Cayman sandwich’ emerged as a representative model. At its apex are global investors channelling capital through the Cayman Co., a conduit that funnels these resources into a US-based limited liability company (LLC), which ultimately finances target startups around the globe. This arrangement, though prevalent, is rife with tax challenges. These range from issues concerning indirect share transfers to the tax residency of the involved entities and the variable nature of tax treaty benefits. Additionally, the regulatory environment founders operate in was spotlighted, especially with rules like controlled foreign corporation (CFC) rules and passive foreign investment company (PFIC) rules coming into play for individuals.

In contrast, the ‘Intermediate Holdco’ structure adds another dimension to the investment equation. This model sees funds flow from international investors to an intermediate holding company, which then reroutes these resources through a corporation to the final startup targets. The tax challenges encountered here echo those faced by the ‘Cayman sandwich’, with a special emphasis on the possibility of dual residency for corporations and the complexities founders face against the backdrop of ever-evolving regulations.

As the panel approached the third phase, the conversation pivoted to the ‘IPO or other exit’ theme. This phase is a watershed moment for companies, where decisions around dividends, redemptions, mergers, acquisitions and, especially, IPOs come into sharp focus. The strategic timing of an IPO, and the choice of market – US or otherwise – can make or break a company’s market perception and valuation. Astute decision-making here is a lynchpin in a startup’s long-term prosperity.

Lastly, the discussion took a deep dive into two areas intrinsic to the startup ecosystem: compensation structures for founders and key employees, and the vital differentiation between employees and independent contractors. Equity and options stood out as primary tools for aligning the interests of top-tier employees with those of the company. Meanwhile, the classification of workers has far-reaching implications, spanning benefits, legal protections and tax considerations. The choices made in these domains can profoundly influence a startup’s course, underscoring the importance of strategic decision-making.


In conclusion, the startup landscape is a complex tapestry of strategic decisions, from the initial formation to the exit strategies. Each phase presents unique challenges and opportunities, with tax implications and operational considerations at the forefront. Founders’ and key employees’ compensation structures, coupled with the intricacies of worker classification, further add layers to this multifaceted environment. As startups navigate this dynamic ecosystem, a thorough understanding and proactive approach to these issues are imperative for sustained growth and long-term success.