Coming to America – Foreign Founders and the U.S. Startup

Numerous technology and other companies were founded in the United States by entrepreneurs with strong ties to foreign countries and regions such as Russia, India, Israel, China and Latin America.  For tech companies, many times, the decision to incorporate in the United States, and specifically in Delaware, is driven by the preference of U.S.-based venture capital firms and other investors to invest in companies incorporated in Delaware. 

After reviewing tax and other considerations, founders may decide to incorporate the company or the parent entity in the United States, while some or all of the founders, employees or services still operate in a foreign country.  Foreign operations present legal issues for companies of all sizes.  Below are some legal considerations to keep in mind at the early stages of operations, after making the determination to incorporate in the United States. 

 Compliance with U.S. and Applicable State Law.  The new company should comply with the laws of its place of incorporation and where it conducts business in the United States  While this may seem obvious, some founders and foreign counsel may not be fully aware of local requirements and legal differences between the specific foreign country and the state where compliance is required.  In addition, arrangements regarding foreign employees may still be subject to compliance with certain U.S. laws.

    • Corporate Law Compliance.  A state corporate law would have special requirements regarding due incorporation, board election, share issuance, board and stockholder meetings, notices, waiver of rights, voting, fiduciary duties and other matters. 

 

    • Securities Laws Compliance.  Federal and relevant state securities laws must be complied with to ensure a proper exemption from registration of the company’s shares upon issuance.  

 

    • Option Plans and Equity Grants.  There are federal and state tax and securities law requirements controlling the operations of option plans and equity grants in the United States.  Note that some provisions may be applicable to foreign employees in general or to employees that may later move to the United States.  For example, foreign persons receiving restricted stock should consider making an 83(b) filing election (for recognition of tax on purchase date) if such persons may relocate to the United States prior to the time the stock fully vests or are otherwise subject to U.S. taxation.  The filing must be made within 30 days of issuance of the stock.  The short filing deadline is not extended and there is no relief for persons who were not U.S. taxpayers at the time of purchase of the stock.

 

    • Compliance with Section 409AThe broad provisions of Section 409A of the Internal Revenue Code of 1986, as amended (“409A”) for deferred compensation arrangements may reach beyond U.S. borders, subject to certain exceptions, if an individual is subject to U.S. taxation or becomes subject to U.S. taxation. If an arrangement fails to comply with 409A, the service provider incurs taxation upon the vesting of the applicable deferred compensation arrangement, plus a 20% federal additional tax, interest penalties and state penalty taxes in certain states.

 

    • Compliance with FCPA (Foreign Corrupt Practices Act).

 

 Compliance with Local Foreign Law.  A company incorporated in the United States (or its local subsidiary, branch or affiliate) will still need to comply with local foreign law with respect to its foreign employees and service providers.  At the formation stage, this is most notable in the following areas:

    • Option Plans and Equity Grants.  Jurisdictions vary with respect to their treatment of options and equity grants and certain terms of such grants such as vesting.  While the company’s plan should be compliant with U.S. and state laws, it may require creation of a sub-plan or adjustments for its foreign participants.  For example, in Israel a special tax treatment can be afforded if options are held by a trustee and certain requirements are complied with.  In some jurisdictions options may be taxed at the time of grant.  Equity grants and their terms should be reviewed in connection with foreign law.

 

    • Intellectual Property.  The assignment of intellectual property to the company is key to a technology company.  It is important to ensure that the assignment is enforceable under local law.

 

    • Labor and Employment.  Jurisdictions may have special labor laws, including minimum-wage, pensions or mandatory retirement savings, termination and severance. 

 

  • Data Protection/Privacy Laws.  Some jurisdictions have stringent privacy and data protection laws that prohibit the transfer of certain employee information. 

This post on Start-up Issues was authored by Maya Blumenfeld.

 
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