A topco is the company that sits at the very top of your startup’s corporate structure. In most cases (see the Clara Tip below for the exceptions), it acts purely as a company to hold shares in the company or companies of your startup that actually carry out your business (these are sometimes referred to as operating companies or subsidiaries). You may have heard of this type of company being referred to as a holding company or holdco.
Clara Tip: In some jurisdictions, you may only have a single company that acts as both your main operating company and your topco (e.g. Delaware, England and Wales or other jurisdictions that your startup might operate from that are also investable jurisdictions.
Key features of a topco
It’s in an investable jurisdiction.
Allows for the creation of multiple classes of shares.
Relatively quick and cheap to set-up.
Allows for quick corporate actions, such as issuing and transfer shares and making changes to the board of directors.
Doesn’t carry out any commercial activity other than holding shares in subsidiaries.
Is where all shareholding related to your startup will typically sit (founders, investors and incentive shares for your team).
Why do I need a topco?
Unless your startup happens to operate in an investable jurisdiction, most simply, because most investors (including accelerator programmes you may want to join) will require that set up a topco before they agree to invest.
It offers better protection for founders vis-à-vis each other because the terms of a Founders Agreement (including, most importantly, regarding vesting) are recognized and enforceable in an investable jurisdiction.
Adds an extra lawyer of protection between you and the business operations of the startup which limits your liability and keeps your topco “clean”.