My business and team are based in South America. We have no U.S. sales or operations but are looking to raise money from U.S. VCs. [Law firm name redacted] says I have to re-incorporate in Delaware because no U.S. venture capital fund will invest outside of Delaware. Is that true?

Not to be too direct, but you should upgrade your law firm as it lacks any global tax practice. This is not the kiddie table. Following its advice could be a $50+ million mistake in the future as you are subjecting yourself to needless taxes on your global income and will lose a lot of flexibility for global expansion. The United States, unlike most other countries, taxes on global income. Why would you voluntarily give away money that could be reinvested in your growth?

Many companies from outside the United States have received this same advice, as most U.S. venture lawyers are ignorant of global tax issues. Take Mercado Libre, a now $60 billion public company based in Argentina. It was set up in Delaware. Now it is subject to U.S. filings and taxation, even though it has no real sales in the United States. I can think of dozens of examples of similar companies and discuss a few in the class just released, 3.101 Set Up Step By Step.

Given your footprint, you seem already well structured (always have specific international tax experts advise you). If you ever do have U.S. operations, you can discuss with those experts how to optimize your U.S. operations then (and how to minimize U.S. tax nexus).

Your question, though, is whether a U.S. VC firm will invest outside the United States. The answer is it depends, but any top one will. Most U.S. funds have now invested in China and other jurisdictions where tax optimization mattered a great deal.

If you get pushback, say that you are open to any jurisdiction if the investor insists, but then ask your investor to get advice on the tax effect of proposed corporate change first. For example, when Sequoia offered a term sheet to a prominent South American startup, Sequoia’s lawyers originally required a Delaware reincorporation. I met with the venture partner at Sequoia and suggested we speak to the international tax partners at Sequoia’s own outside accounting firm. Sequoia’s accountants immediately explained the virtues of leaving things as they were.

Even if venture lawyers are largely ignorant about the financial effect of taxes, VCs are not. VCs will quickly understand the value of paying a 6% tax rate on global income, as opposed to 21% or 35% rate. A lot of relearning can occur rapidly if the endgame is saving double digit rates on taxes.

On the chance that you have no real option but to reincorporate into Delaware because no one will invest except funds who insist on destroying your global tax structure — despite all your efforts — you can make the hard decision then. And you might rationally cave, as being unfunded could be a worse evil. Until then, do nothing to upset your structure as you cannot reverse coming into the United States tax system later.

See also: 3.101: Set Up Step By Step