Americans on the cap table: what founders should know before the raise and the exit

Figures relate to tax year 2025-26 (UK) · 2025 (US)

Your co-founder holds a US passport, two of your angels are American, and the option pool includes an engineer who grew up in Chicago. The cap table looks ordinary from a British point of view. From an American one, it creates obligations that arrive every year and bite hardest at exit.

None of this stops a company working. It does change who files what, and it changes the arithmetic on a sale. So this guide covers the main exposures, when they start, and the decisions worth taking early.

Key takeaways

• American shareholders with 10% or more bring annual reporting for themselves.
• If Americans together hold more than half, the company becomes a controlled foreign corporation.
• That status can tax company profits on individual American shareholders before any dividend.
• A company holding mostly cash or investments can create a worse problem for small US holders.
• British reliefs such as EIS and business asset disposal relief do not reduce American tax.
• Diligence at exit will ask for all of it, so early records save the deal timetable.

What is a controlled foreign corporation?

Per the IRS rules on foreign corporations, it is a company where American shareholders, each holding at least 10%, together own more than half. Once a cap table crosses that line, those shareholders can face American tax on some company profits each year, whether or not the company distributes anything.

British founders often find that startling. The company pays corporation tax here and keeps the rest to reinvest, and an American shareholder may still owe tax on a share of it.

Who on the cap table has to report?

The shareholders, not the company. According to IRS guidance, an American holding 10% or more usually files Form 5471 each year, and directors can have filing duties too. The company itself files nothing in America, though it provides the figures those filings need.

That distinction matters for founders. You cannot fix a shareholder's filing for them, but you can make it easy by producing accounts in a usable form.

Our guide to Form 5471 categories sets out who falls into which category.

The cap table problem nobody expects

America can treat a company holding mostly cash or investments as a fund. Small American shareholders then face a punitive regime on gains and distributions, with a charge that grows the longer they hold.

This catches companies that raise a large round and sit on the cash, and holding companies formed for a single investment. Trading companies with real operations usually escape it.

In our practice this is the exposure founders have never heard of. It affects the small holders, not the founders, which is why nobody raises it until diligence.

British reliefs do not travel

EIS and SEIS relief, business asset disposal relief and the investment reliefs behind many British rounds have no American equivalent. An American shareholder gets the British benefit and still faces American tax on the gain.

That mismatch surprises angels most. A British investor and an American investor in the same round can end up with very different net returns from an identical exit.

Our guide to selling a UK business covers the founder's side of an exit in detail.

What should founders ask investors?

One question, early: are you a US person for tax purposes? It covers citizens, green card holders and long-term American residents. Add it to the subscription paperwork so every cap table entry carries the answer.

Investors rarely object. Most American angels know the position and expect the question.

Ask option holders too. An employee who spent years in America may still hold a passport, and the option paperwork rarely asks.

Does the answer change at each round?

Yes, because the percentages move. A cap table that sat safely below the halfway line can cross it when an American fund leads the next round. Nobody notices unless somebody checks after each close.

Make it part of the post-round checklist. It takes five minutes and it prevents a surprise two years later.

A worked example

The figures below are illustrative. Take an example: a London software company with two founders, one American, and a seed round that leaves Americans holding 55% of the equity.

The company is now a controlled foreign corporation. Each American holding 10% or more files annually, and some retained profit can reach their personal returns before any dividend arrives.

At exit five years later, the British founder claims business asset disposal relief on the gain. The American founder pays American tax on the same gain, with credit only for the British tax actually paid.

What about options and the pool?

Options create their own timing problems. A British EMI option is tax-efficient here, but America taxes on its own schedule, often at exercise rather than sale. An employee who moved between countries during the vesting period needs both timelines mapped.

Keep grant, vesting and exercise dates for every holder. Our guide to share schemes across the US and UK covers the mechanics.

Does it affect the valuation?

Rarely on its own. A buyer prices the business, not the cap table. But unresolved reporting can slow a deal, and a slow deal sometimes costs money in other ways.

Warranties are the sharper point. A buyer may ask the sellers to warrant that shareholders have met their own filing duties. That is hard to give if nobody ever asked.

So the tidy cap table is worth more than the clean answer. It keeps the process moving.

What if an American joins later?

The position starts from that point, not retrospectively. A new American holder brings their own reporting from the year they acquire shares. Existing holders are unaffected unless the combined percentage crosses the halfway line.

Check the maths on the day of the round. A cap table that was fine last year can change with one new investor.

When should founders look at this?

At the first round with an American on the register, not at the term sheet for the exit. Early fixes are cheap: an election here, a structure there, a note in the shareholders' agreement. Late fixes usually are not.

1. Ask every shareholder and option holder whether they are a US person.
2. Record the answers, with percentages, and update the note at each round.
3. Check whether Americans together cross the halfway line after each raise.
4. Test whether the company looks like a fund rather than a trading business.
5. Agree who produces American-ready figures from the statutory accounts.
6. Flag American holders to your lawyers before drafting the next round.
7. Review the position again before any sale process begins.

Does an entity election help?

Sometimes, and the question belongs early in the company's life. Treating the company as transparent for American purposes can simplify one shareholder's position while complicating another's. It also has consequences for the company's own structure that British advisers may not raise.

Any election affects every American holder differently. So it belongs in a conversation with all of them, not a decision taken by the majority.

Three habits that keep it simple

Ask the question at every round. Note the answer on the cap table. Check the total after each close.

That is the whole system. It takes minutes per round and it saves weeks at exit.

Founders who do it rarely need us in a hurry. The ones who do not tend to call during a sale process.

What diligence will ask for

A clean list of who holds what, tax residence for each holder, and evidence that American shareholders have been filing. Buyers with American counsel ask these questions as a matter of routine, and gaps slow the timetable.

Companies that kept a register of US persons from the first round answer in an afternoon. Those that did not spend weeks chasing shareholders they have not spoken to in years.

Who pays for the extra work?

The shareholders pay for their own filings. The company usually pays for the analysis behind them, because the figures come from its accounts. Many founders build a small annual budget for this once Americans join the register.

It is not a large sum. Preparing usable figures once a year costs far less than the diligence scramble that follows a sale.

What happens at a share buyback?

It can be taxed very differently on each side. Britain may treat a buyback as a capital gain in some cases, while America can treat the same payment as a dividend. An American shareholder can therefore face ordinary income rates on what looked like a capital event.

Check before structuring any buyback that includes American holders. The order of steps can change the outcome for them.

The same applies to a secondary sale during a round. Ask how each selling shareholder is taxed before agreeing the mechanics.

What about a US holding company?

Some investors push for one. A Delaware parent over the British company can suit American funds, and it changes where the tax sits. It also adds filings on both sides and can waste British reliefs for the founders.

Flip the company only for a clear commercial reason. The tax follows the structure, not the other way round.

And flip early if at all. Doing it later, once value has built up, tends to trigger tax in one country or the other.

Mistakes and penalties we see with cap tables

• Never asking shareholders about US status, then discovering it during diligence.
• Crossing the halfway line in a round without anyone noticing.
• Leaving a large cash balance in a company with small American holders.
• Assuming British investment reliefs protect American investors too.
• Granting options to US persons without mapping the American timing.
• Producing accounts that nobody can turn into American filings.

The penalties fall on the shareholders rather than the company. But a shareholder facing a $10,000 penalty per missed form per year will not thank the founder who never mentioned it.

So tell them early. A short note at the round, naming the obligation and suggesting they take advice, costs nothing and protects the relationship later.

How US UK Tax Accountants helps

We review the cap table at each round, flag the exposures to the founders, and prepare the American filings for shareholders who need them. Before an exit we make sure the answers exist before diligence asks. If Americans sit on your register, get in touch and we will review it alongside our treaty relief work.

Last reviewed 24 September 2026. This article is general information and not personal tax advice. Shareholder positions differ, so each holder should take their own advice before acting.