How Brian messed up
so you don't mess up as he did. Learn how to set up your corporate structure the right way.
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Our co-founder Brian Requarth has been very public about his past mistakes while building and selling Viva Real, his previous venture.
TL;DR: a company structure mistake led Viva Real to pay US$100M in avoidable taxes when they were acquired by OLX. 😬
But how did this happen?
We'll tell you now, so you can avoid it. 👇
1. When Brian first started Viva Real, his local law firm in the US had no experience with venture capital or Latin America. So the lawyers suggested setting up a C-Corp as a corporate structure.
2. That worked for a while, until Brian found out that made Viva Real subject to corporate taxes in the US in case of an exit. At that point, changing this would be so costly and complicated that they were forced to let it go. They kept an operating company in Brazil, an intermediary Delaware C-Corp in the US, and a holding company in the Cayman Islands.
3. Cut to 2019, when negotiations with OLX began. The ideal game plan would have been to sell the Cayman Islands entity but OLX said, "Not a chance in hell." That would've been risky given how Viva Real went back and forth in its structure in the past. OLX's offer was for the shares of the local operating companies.
4. Since the Delaware C-Corp owned 100% of the shares of the Brazilian subsidiaries, the transaction would technically count as selling assets. So not only would Viva Real have to pay regular corporate taxes but also have to cover business capital gains taxes in the US.
5. Add that to all of the individual taxes they were subject to, and over US$100M was paid by Viva Real and stakeholders to the US government for a business that never made so much as a penny there. All because of a bad legal decision.
So does that mean that you should avoid a C-Corp? Noooot necessarily.
Choosing to form a C-Corp or an LLC in the US is all about considering how you can go from point A (your local structure) to point B (the holding company) in the most tax-effective manner, thinking about your objectives.
But hey, we can't predict the future here, so you should always commit to the Minimum Viable Incorporation for the sake of your peace of mind – and your budget. For Latin American founders, that can often mean sticking to a basic corporate structure in their own country for as long as they can. Think SAS in Colombia, SAPI in Mexico, LTDA in Brazil, etc.
You won't really need to worry about setting up legal entities overseas until it's time to get ready to fundraise. We put together a decision tree to help you understand where you and your business stand and where to go from here:
Talking to lawyers isn't as glamorous as selling to customers or building an MVP. But if you take away only one thing from the 11 years Brian spent building his previous company, let it be that investing the time as a founder to do the work upfront will save you money (and headaches) down the road.
📌 Are you a Brazilian startup fundraising and need some help to incorporate? We can make your life easier 😎
Wanna join us in deciphering the future of LatAm?
Of course you do. We're collecting founders' and investors' insights for our beautiful and insightful LatAm Tech Report 2023. Last year, it had 7,000+ downloads. 🔥
Now we wanna hear you.
We'd really appreciate you donating 10 minutes of your day to tell us about you and the ups and downs you've been seeing in the region. 🔮
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Hot News Ahoy! ⛵
🤑 July bringing the dime
According to Sling Hub, July was 2023's best month for startup fundraising in LatAm. Investors put in about US$ 800M+, 10% more than what we saw in the former best month of the year (January) and 68% more than June's investment volume. Fingers crossed 🤞
📈 Licify's on the rise
Licify, a digital marketplace that offers financing for the construction industry, secured a USD 3.4M Seed round. The startup will use the money to expand its operations in Colombia and Mexico. Congrats to the entrepreneurs Fernando Olloqui and Pedro Celia! 👏