Breaking Into The US: An Easy Guide For European Founders Taking The Plunge
Setting your sights on the US? Incorporating your company as a California LLC, or maybe a Delaware Corporation? Get ready for a whole lot of paper work — or not, if you know what you’re doing.
This post is co-authored by Pia Henrietta Kekäläinen (CEO and founder of Carbo Culture, Wave Ventures’ portfolio firm) and Aleksis Tapper (co-founder of Wave Ventures).
Carbo Culture’s recent expansion into the United States has resulted in us receiving several enquiries regarding the process of establishing a company in the US. The process is often seen as daunting and challenging for startups, who already have their hands full with building the product and the business. Based on our own experiences, and in order to help founders focus on the essentials, we have decided to compile a checklist of key matters to take into consideration when thinking about expanding your startup into the US.
One cannot emphasize enough the importance of the preparatory work and research done prior to initiating the process. Venturing into the US usually takes some amount of work, and you will soon come to realize that the legal structures differ substantially from those of the home country. The eventual form of your overseas operations will primarily be determined by your business objectives, current and future investors, as well as tax and legal considerations. It is crucial to select the arrangement that best serves these interests, and to understand that the decisions you make now, will eventually have long-lasting implications on your future business operations. Do not let this put you off though — there are plenty of people and online services to help you out with these matters.
Preparation is key.
Things such as choosing the right company structure are matters in which you should not hesitate to consult other entrepreneurs, investors, and lawyers — that is, people who have all gone through the hassle at least once or preferably multiple times.
To that point, beware of advice from people who say you need a fancy lawyer. You don’t. You simply need a responsive and reputable lawyer with experience of dealing with US incorporations of European startups. Paper filing and form sending in these type of cases is typically very straightforward and most of the documents are readily available templates. In fact, the whole process should not really cost you over $ 4k. [Note: Even Carbo Culture was told that they need a fancy lawyer, who would have cost them at least $ 20k.]
If you still after all this think that your company is ready to take the plunge across the pond, below are some useful tips on how to avoid the most common pitfalls and get things rolling as smoothly as possible.
INCORPORATING THE US COMPANY
There are differences between states when it comes to incorporating your company. Most investors prefer to make their investments into companies incorporated in the state of Delaware (no need to go to Delaware though) as a Delaware C Corp, which is the most widely used entity type for startups in the US. Corporate law in Delaware (DE) is well developed and most investors, lawyers, and other officials are used to dealing with DE law. Moreover, VCs do prefer to invest in DE corporations and in some cases, might refuse to invest into any other types of entities. The Corporation provides protection for the shareholders’ personal assets and keeps them separate from the debts and liabilities of the company.
There are several services on the web e.g. Clerky, that are of tremendous help during the process of incorporation.
Documents needed for incorporation:
(1) Bylaws: Internal rules of a company, established by the board of directors during incorporation.
(2) Organizational resolution: Consent of the board of directors to approve all the actions and resolutions taken during the incorporation process.
(3) Shareholders’ agreement (SHA): One of the most important agreements in respect of a company. The SHA is an agreement setting forth the rights, duties and ownership relations of the company’s shareholders. This agreement, especially the one concerning the parent company, is one of the most fundamental and important agreements signed during the incorporation.
CHOOSING THE RIGHT COMPANY STRUCTURE
Parent company vs. subsidiary. The relationship between these entities should be arranged as clearly as possible. The first step is to determine whether the US entity should be established as the subsidiary of the company or as the parent entity.
Things affecting this decision are among others: what kind of entities the targeted investors have funded previously, whether the company is seeking to obtain governmental grants as a part of its fundraising (the company’s eligibility for said grants is dependent on the entity structure), and finally an analysis of the flow of funds (i.e. which of the entities finances the other’s operations in the beginning), to avoid facing unnecessary issues with transfer pricing early on. Simply envisioning where your company could be growing the most can also be helpful.
As a rule of thumb, valuations for companies at similar stages are considered to be higher (although the operating costs are as well) in the US, where the investors are also more willing to grant stock options to the employees. These are things that are of course always negotiated on a case by case basis.
Getting the company structure wrong might become expensive to amend afterwards. This amendment of ‘’switching’’ the entity structure later on is also known as the “Delaware flip”.
Documents needed for managing the relationship between the parent company and its subsidiary:
(1) Intercompany agreement: Main agreement governing the relationship between the parent company and the subsidiary.
(2) Stock purchase agreement: Agreement whereby the parent company acquires all the shares of the subsidiary.
(3) Statement of works: Document stating the details of the subsidiary’s operations. The parent company provides the subsidiary with cash based on what is stated in this document.
(4) Note purchase agreement: Agreement used for moving funds between the entities.
MANAGING YOUR EMPLOYEES
Employment laws are quite complex in the US and not all terms, such as non-competition, can be enforced in every state. Remember to use a US “offer letter” instead of your European employment agreement templates, and make sure to have a confidentiality and IP assignment agreement signed with all employees of the company.
Employment related litigation is a substantial risk in the US. Even though US employees can theoretically either resign or get fired “at will”, i.e. without notice or cause, the termination of an employee’s term at the company should always be handled in a delicate manner. This, in order to avoid the significant risks associated with claims or litigation due to discrimination, harassment, or other misconduct by the company.
Further, make sure that the current employee stock option plan (ESOP) of the company is aligned with US standards. This becomes essential when hiring key employees from the US, and is something US investors might want to see reflected in the company’s cap table as well, in a form of available equity for incentivizing future employees with stock options. For this purpose, we warmly recommend you check out the Index Ventures’ guide to employee stock options.
Documents needed to properly manage your employees:
(1) Offer letter: US version of an agreement similar to an employment agreement.
(2) Employee confidential info & invention assignment agreement: Basically, an agreement intended to keep the employee from disclosing any confidential info about the company’s business to outsiders, and requiring her to assign all or some of her previously developed intellectual property to the company.
(3) Indemnification agreement: Agreement for directors and officers to minimize potential personal liability for actions taken in their capacity as members of the board and management of the company.
(4) Consulting, advisor, paid intern, unpaid intern agreements: Agreements for certain type of short-term workforce. Important to remember to include the confidentiality and IP assignment clauses in these as well.
(5) Independent contractor agreements: Agreement where the party being hired is explicitly stated not to be an employee for legal and taxation purposes. An even more flexible form of short-term workforce agreement than the ones mentioned above.
ESTA & Visa
Work Visas in the US are divided into two categories: (1) immigrant/permanent and (2) non-immigrant/temporary Visas. You are allowed to conduct business negotiations on an Electronic System for Travel Authorization (ESTA), but not to seek employment in the US. As soon as the business starts to take off seriously and you need to spend more than a few months in the US, you will need to get either a temporary or a permanent Visa. For this, hire a reputable immigration lawyer, with a successful track record of obtaining Visas for foreign employees of US based companies. This will be somewhat expensive, but the costs should not exceed $ 7,5k.
OTHER PRACTICAL MATTERS
Acquire an Employer Identification Number (EIN) for your company
Every business in the US needs an Employer identification number (EIN). After the incorporation is done, you can fill form SS4 and call the IRS Philadelphia Center directly at (800) 829–4933 (this is the only office in the US that processes EINs for foreign businesses looking to incorporate in the US). They will give you the EIN on the phone.
Make sure to get a US bank account
You will need a business checking account with a US bank for your business. If you already have a personal bank account with a US bank, you can try calling them to open a business checking account. Make sure that the company has good online banking services and depending on your line of business, you may also want to get cheques (yes, they still exist, and some subcontractors even prefer them).
Most banks have different pricing models for start-ups. Remember to bargain to get a good deal, as the banks will make sure to lift the price, as soon as your transactions start to increase. Silicon Valley Bank and Chase were recommended to Carbo Culture, of which the company chose the former, as SvB had their own manager specialized in companies dealing with clean technologies, and they did not shy away at them, despite Carbo Culture being a newly established company with foreign founders.
In addition to a US bank account, you also need a physical US address for receiving your business documents. There are several mail forwarding service providers charging varying rates, Carbo Culture for example decided to go with Virtualpostmail.
This is something that you will want to outsource, especially if you are not set up to speed with tax compliance laws or if you are incorporated in Delaware and your company needs permits to work in California, or if you simply want your payroll and bookkeeping to be handled by someone else.
Carbo Culture chose to go with Slimaccounting, because of the easiness to work with them, and the company having all the tools digital. They also agreed to work with the Finnish parent company’s external CFO to merge the books monthly for accurate investor reporting. For now, Carbo Culture is also using Xero for accounting, Gusto for payroll, an online bank for paying bills, and a shared Dropbox folder for saving receipts.
When it comes to accounting in the beginning, we suggest you keep things as simple as possible — you can always add complexity as you go. Agree with your accountant and/or finance manager that payments under e.g. $ 300 may be paid by them, and everything above that (e.g. credit card bills) should be verified and approved by you.
Finally, as no legal advice would be complete without a disclaimer… this article should not be regarded as a legal advice of any kind ;)
// Aleksis & Henrietta