Growing up in Chile, Leonardo Barrientos didn’t know much about Delaware, at least until he went to law school in Santiago. He took a couple classes on American law, and only then did he come to understand how this unassuming state had become the preferred incorporation site not just for U.S. companies but for any foreign startup seeking funding from American venture capital. 

Despite the fact that the global startup economy is driving more innovation than ever, founders from Chile to India to Nigeria are compelled to incorporate their companies in Delaware, if they seek sizable capital for growth. Incorporating in Delaware may seem like a dramatic imposition on a startup’s identity — doing so is often to its legal and financial detriment —but most founders accept it as a necessary step to achieving international success. The Delaware path to incorporation has become so baked into the global technology market that, rather than try to supplant it, companies are building products to help navigate the state’s complicated corporate restructuring procedure, now virtually required of foreign companies by both local and American funders. 

Overseas startups don’t choose Delaware because of some special tax break; the practice is based on a precedent that dates back to the turn of the century. In 1899, when Delaware enacted its General Corporation Law, the state laid the foundation for itself to become the incorporation hub of the United States. The law empowers courts to simplify the incorporation process; now, over 50% of publicly traded American companies are formed in the state. 

Chris Field, a cofounder of legal-tech startup Clerky, said that this set off a feedback loop. “More and more people started gravitating there,” he said, “and the system got more mature and more built out.” As a result, lawyers across the United States — and the world — began developing Delaware-specific expertise.

Field said that during the dot-com bubble, many Silicon Valley companies would still form in California, but “by the mid-2000s, it really had become the de facto standard: Always form a startup as a Delaware corporation.” Today, the largest tech companies, including Google and Facebook, are all incorporated in Delaware.

Anil Advani is the managing partner at Inventus Law, a Silicon Valley corporate law firm. “If you’re trying to become a global company, then you want to look like, smell like, and talk like any other successful Silicon Valley company,” he told Rest of World. “When it comes to legal structure, don’t try to be creative.”

In Chile, where Barrientos began to learn about Delaware’s importance, he worked for one of the biggest financial consultancy firms in the country and saw firsthand how convoluted incorporation was. “You could tell how much founders struggled with legal fees and how to structure their companies correctly,” Barrientos told Rest of World.

Barrientos knew of products in the United States, such as Field’s Clerky and LegalZoom, that used technology to help automate legal procedures, incorporation in particular. But they catered to American startups; for overseas founders, the practice introduced a host of additional complications.

That’s when Barrientos decided to found his own startup, Lexgo, which makes incorporating in Delaware easier for Latin American companies. When Lexgo applied for funding from Y Combinator, the famed Silicon Valley startup accelerator, Barrientos went through the Delaware incorporation process himself; it’s a requirement for all participants, foreign or American. Although Lexgo wasn’t accepted, the decision to do the paperwork immediately paid off: When Barrientos took meetings with U.S. investors, they initially weren’t interested because Lexgo was based in Santiago. “Right away, we told them, ‘We’re a U.S. company. That shouldn’t be a problem,’” he said. The company raised a $373,000 seed round in 2019. 

“If you’re trying to become a global company, then you want to look like, smell like, and talk like any other successful Silicon Valley company.”

But it’s not always American venture capitalists pressuring companies to incorporate in Delaware — VCs from outside the U.S. also say they prefer their portfolio companies to be incorporated there. 

Kayode Oyewole is a partner at Ventures Platform, an early stage Nigerian VC fund. Oyewole told Rest of World that his fund encourages startups it believes to have international potential to register in Delaware because it will make it easier for them to raise capital, even if years down the line. Paystack, a Nigerian payments company that was recently acquired for more than $200 million, was backed by Ventures Platform in early investment rounds. Originally a Lagos-based entity, Paystack incorporated in Delaware in 2015. The push to incorporate in the U.S. has had knock-on effects for other business services too. Many technology products aren’t available to international companies, among them Stripe and the capitalization-table management platform Carta. Barrientos said he has heard of VCs who refuse to invest in companies that don’t use Carta, automatically disqualifying companies incorporated abroad. “And there’s no Carta of Brazil,” he said. Stripe, similarly, is not available in any African or Latin American countries, although it’s currently being tested in Brazil. 

But in order to obtain the benefits of American incorporation, overseas companies must overcome the hurdles of a complete internal restructuring. The complex endeavor requires companies to perform a corporate “flip,” or inversion, whereby a foreign entity becomes a subsidiary of a Delaware holding company that sits atop the corporate structure. 

Products like Lexgo and Clerky are making things smoother and more affordable for international companies. Even so, Clerky cofounder Darby Wong said he still encourages users to hire a lawyer to avoid small errors that could result in what he refers to as a “runaway chain reaction.” 

Because incorporation is expensive — often costing close to $10,000 — many startup founders try to take shortcuts. Mistakes during the process can have deep implications for a company, jeopardizing its intellectual property and even its tax standing back home. 

For now, complicated corporate flips and all, incorporating in Delaware remains the price of admission to the global startup market. 

Iyinoluwa Aboyeji is a Nigerian founder of two well-known startups, Andela and Flutterwave. Despite being founded in Nigeria, both were incorporated in Delaware. Aboyeji said he’s not averse to keeping his operations in Nigeria — he sometimes faces prejudice in the U.S. because of stereotypes about Nigerians. “If [American VCs] were willing to fully fund me, I would incorporate in Nigeria,” Aboyeji said. “You just kind of acquiesce and make it easy for people to deal with you.”

Barrientos said he doesn’t mind that he had to go through Delaware to incorporate. In an ideal world, he would be able to incorporate in whatever country made the most sense for tax purposes, rather than prioritizing where VCs invest. “We are a long way away from that,” he told Rest of World. “But I think we’ll probably get there.”