An Investor’s Tips for
Structuring an Emerging Market Start-Up — Part II
In Part I we explored the benefits of setting up a company early on, and the factors to consider when the time is right to set up an offshore holding company. Now, let’s look closer at what to do about nominee arrangements and banking relationships, as well as getting your structure ready for an exit event.
Minimise any nominee arrangements
Many industries such as financial services and media across emerging regions are subject to local ownership or control requirements, requiring certain types of business to be fully or majority-owned by a local entity or person. Where such legal restrictions exist carefully consider all possible alternative methodologies for legally or contractually structuring around it, as if a business (or indirectly its investors) only “own” shares in a local entity through indirect nominee relationships, the ability to enforce these ownership rights is lessened.
If business-critical functions or material revenue is generated through such nominee held entities, this will likely impact investor’s evaluation of your business.
Where such a structure is unavoidable by law, however, restrict as far as possible what’s in the nominee-owned entity, and in particular, where possible, don’t assign any valuable intellectual property to it. Also, take legal advice to make sure you’re operating as robust arrangements as possible to ensure that the nominee will fulfill its obligations towards your holding group.
The revenue your business generates, or the capital investors agree to inject, means little if you can’t access it or use it freely. To do so, you need to have a reliable and robust banking counterparty. As your business starts to grow beyond its earliest domestic stages, finding appropriate cross-border banking partners should be one of your primary structure and operational related objectives. This is increasingly difficult in ever more regulated, risk-averse and regionally divided global financial system.
Find the right partner
Appropriate cross-border banking partners must be sophisticated enough to understand your business model: when you get to the point of attracting foreign investment or receiving customers’ payments from around the globe, you need an outward-looking commercially-minded banking partner that is able to facilitate this seamlessly and not freeze every single dollar, euro, shilling or renminbi received from overseas.
You also need a partner that is integrated into the global correspondent banking network.
While early in your business’ life you will likely struggle to attract a Morgan Stanley or a Goldman Sachs, building a relations with the local branch of international SME-friendly bank is essential.
Without this in many emerging regions, you may struggle to freely receive many non-local currency inflows which will likely pass through the US banking system at some stage.
Keep things simple and transparent with your bank
Due to the vast global growth of money laundering legislation, anti-tax evasion and transparency systems and the massive explosion in the growth of economic sanctions as a tool of foreign policy, compliance departments have come to rule banks. As a result banks back away very fast from any risk — whether real or imagined.
If you’re an emerging market tech start-up, international banks will likely be cautious about doing business with you. Invest time and effort into building relations with an appropriate partner.
Don’t withhold information and keep your corporate structure as transparent, understandable and blue-chip as possible.
Step 3: Bring out the advisors
In the event that you’ve successfully closed several up-rounds of financing, revenue and margin have grown aggressively year-on-year and you’re well on track to building a dominant regional champion or a successful global export business, your mind — and that of your investors — will naturally increasingly turn towards future exit opportunities. However, don’t be caught out and assume all the hard work has been done: in order to reap the benefits of all you’ve created, it will likely pay significant dividends (definitely metaphoric and possibly literal) to reconsider your structure once again.
While, depending on the profile of your investors, a relatively inexpensive, flexible holding structure in an exotic zero tax jurisdiction may possibly be suitable in the earlier stages of your corporate life, there will come a point where you will likely need to sacrifice some or all of the tax and other benefits. Putting aside for the moment other topics like captable composite, equity structure, and appropriate reporting systems (all of which can have a huge impact on the “exitability” of a business, but which are beyond the scope of this article), pure corporate structure alone can have a significant effect on your exit outcomes.
If an IPO is a likely exit option then you will need to think some significant time ahead about ensuring you have a “listable entity” type located in an appropriate jurisdiction, with audited financial statements that meet both the exchange requirements and appetites of the likely investors on that exchange.
Additionally, you will need to ensure that your overall structure is as simple, robust and understandable as possible for institutional investors.
Likewise, if a trade sale to a large corporate is likely, it may pay to think in advance about making sure your holding company is in a jurisdiction that is considered adequately blue-chip with robust enough corporate law. Data proves that deep discounts are frequently factored in by buyers of businesses that are held in less established jurisdictions where acquirors have less confidence as to the robustness of their diligence findings.
However, when that time comes, it’s time to put Medium posts aside, take a deep breath, and start thinking seriously about investing in some advice from those infamously expensive corporate finance advisors and lawyers you’ve always tried to avoid…Or better yet, get ahead of the curve: once your business needs transformational capital to scale at its full potential, contact us at Digital Spring Ventures.
With an extensive track record of scaling emerging market tech business around the world, we specialise in helping companies to grow, upscale, fundraise larger rounds and head on the right path to a successful exit.