Does incorporating your startup in another country for tax benefits negatively affect being able to raise money from VCs?

If we were to incorporate our company in another company (where one of our co-founder lives), would that seriously limit our ability to raise money from venture capital firms?

The primary benefit to us for doing this would be optimizing taxes. The country our co-founder resides in has 0% tax for both corporations and individuals).

Yes, it would impact raising funding. Plus, make sure what you are doing is legal. For instance, even if you are incorporated outside the US, but operate from the US, you'll need to incorporate or register as a foreign corporation, with the same tax consequences (you'll want to check with someone who is qualified to give you legal and tax advice).

To go back to the question about funding: by incorporating abroad, you are taking a risk. Actually getting funding is a very tricky and subtle dance with investors. Once they are interested, you will discover that any delay greatly increases the risk of the deal being cancelled. For very good reason, VCs never invest in companies incorporated abroad. So you'll have to do a corporate flip at the last minute, which is likely to be complicated and, in the end, will kill the deal.

The silver lining in that most likely, you will never get close to receiving VC funding anyway, so in that case, you'll be happy you save money on taxes.