• TechUkraine, CMS, and Perkins Coie partnered for a webinar on the legal aspects of launching a startup in the USA and the UK
• Six international experts explained how to launch a startup in the UK and the US
• The webinar covered the types of entities that international startups can launch in these jurisdictions, the applicable regimes, as well as the most common pitfalls

TechUkraine teamed up with CMS and Perkins Coie for the Going Global webinar to shed light on various legal aspects of founding and leading tech startups in the USA and the UK. The webinar took inspiration from CMS’ GOING GLOBAL: Factsheet for Tech Start-ups, published in October 2023.

The Factsheet includes key considerations when evaluating a new market (including those about deciding whether to open a subsidiary office, establish a legal entity or acquire an existing company in this legislation) and essential legal knowledge for meetings and negotiations. This comes seasoned with practical tips on regulatory issues, intellectual property, tax, data protection as well as funding (including accessing grants, and other ways to raise capital) and industry associations. The covered jurisdictions include the US and the UK alongside a wide range of CEE countries including Poland, the Czech Republic, Bulgaria, Hungary, Romania, and others.

Following the pronounced interest in the publication, the team behind it decided to conduct a Q&A webinar and share all the additional information that didn’t make it into the Factsheet. The Going Global webinar talked exclusively about the USA and the UK. More specifically, the questions covered were:

• How does a company open a branch in these jurisdictions?
• Who owns the intellectual property rights in a startup in these legal systems?
• What issues could alarm potential investors and prevent them from deciding in favor of funding?
• How can legal illiteracy damage sales?
• And more.

Olga Belyakova, partner and co-Head of the TMT Sector Group in Central and Eastern Europe at СMS, took on the role of the event’s moderator. For the convenience of the audiences only interested in one of the covered jurisdictions, the webinar was divided into two respective sections.

Part 1: The USA

First, Amazon Web Services’ senior corporate counsel Liz Bauzá and Perkins Coie’s corporate counsels Michael Avent and Trey Chernier talked about the nuances of founding a technological startup in the USA.

First of all, when coming to a new jurisdiction, one wonders what it should look like. In return, Mr Avent asks about what brings a founder to the US. This presupposes a couple of subsidiary questions, but Mr Avent points out two main reasons: to facilitate funding from American investors and to accelerate sales in the US, – these are the two main reasons that bring businesses to Perkins Coie.  The reason defines the path for a startup to follow.

Walking through the fundraising reason, Mr Avent outlines the ‘Delaware corporation’ approach where a business incorporates in a jurisdiction with the most convenient corporate law. This is what venture capitalists will typically expect to see. Naturally, the investment will go to this now parent corporation, and the operations team in Ukraine will be the subsidiary.

Mr Avent underscores that this is a very specific type of investment. It is designed particularly for tech startups as they, unlike many other businesses, are particularly venture-backable, i.e. scalable.

‘The flipside would be that if a startup simply wants to open and hire in the US but isn’t necessarily interested in immediate fundraising, then inserting a US top-co is probably an overkill that I wouldn’t recommend. This would make the US office de facto subsidiary, living off of the main entity. And the entire non-US business would get unnecessarily subjected to the US tax regime,’ Mr Avent points out.

Corporation VS LLC

When this is the case, the counsel suggests opening an LLC as opposed to a regular corporation. The difference is that a corporation has a rigid structure, regulated by the law, that includes shareholders, a board of directors, etc. An LLC, on the other hand, is much more flexible in that it’s governed by a contract to which the parties agreed. For a practical example, it may mean that a company won’t need to have a separate board of directors for each jurisdiction.

In other words, the choice between a regular corporation and an LLC is dictated by the goals of where the business wants to be. The speaker reminded that the FActsheet explains the difference between the two types of entities in greater detail.

Mr Chernier specified that all the 50 states have different corporate laws, so for the purpose of the presentation, the speakers concentrate specifically on Delaware as the most popular jurisdiction for startup incorporation.

Delaware’s corporate formalities include:

• A corporation needs a board that will approve all decisions, whereas an LLC can have the processes more streamlined
• A corporation’s board members also have a set of fiduciary duties, while an LLC may go without a board at all. Other 
• A corporation has to pay franchise tax, regardless of whether it is profitable
• The board has to meet a fixed number of times per year

Applicable Regulatory Regimes and Pitfalls

According to Mr Avent, there are several regulatory regimes worth mentioning – first of all, the Committee on Foreign Investments in the US (CFIUS) as part of the USA’s export control regimes. Apparently, the Federal Government has taken an enhanced scrutiny relatively recently on foreign investors who own US businesses, including minority ownership. In case with tech startups, the degree of scrutiny will depend on the technology under development. For example Defense Tech, anything infrastructure-related or any technology that aggregates significant amounts of sensitive data of US citizens are inherently suspect and subject to a heightened level of scrutiny. If a business falls under any of these categories, they are strongly advised to consult with an attorney before making their incorporation decisions.

Further, the relatively new Corporate Transparency Act requires all entities in the US to disclose their ultimate beneficial ownership, albeit not publicly but only with the Federal Regulatory Agency. Admittedly, it is far less strict and more permissive than similar regulations in other jurisdictions.

Finally, the Foreign Corrupt Practices Act imposes criminal penalties on acts of corruption (according to the US Law) outside of the US jurisdiction. In practice, a US business bribing overseas officials gets criminalized by Federal Law. Importantly, this is a permanent point of interest for investors, i.e. a startup accepting US investment will have to expressly state that it doesn’t violate this law.

Mr Chernier wraps up by listing a couple of most common pitfalls for early-stage founders in the USA:

• Lack of complete and accurate formation documents, including stock issuances to founders, grants to employees, IP, etc. from the very beginning.
• Uninformed attraction to stock-backed crowdfunding where a business targets non-accredited investors that exposes a company to a number of security issues and may push away traditional.VC investors.

Part 2: The UK

CMS UK’s corporate lawyer Adam Legge and partner and corporate M&A Sam Pout took the floor to talk about the peculiar aspects of being a tech founder in the UK.

Mr Pout began by pointing out that the UK Law is largely similar to that of the US when it comes to incorporating tech startups. It is also a popular jurisdiction for launching a startup, and the goals of launching in the UK are also largely similar to the US ones: either selling in the UK more organically or inviting venture capital.

Branch VS Subsidiary

Mr Legge specifies that international businesses can set up either a subsidiary or a branch in the UK. The key differences between the two are:

• A branch doesn’t necessarily have a legal personality. It is an extension of a foreign company. A subsidiary is a separate legal personality that is bound to its foreign parent solely through shareholding.
• This means that any liabilities of a branch are assumed by its foreign parent, whereas a subsidiary holds its own liabilities, up to the amount of share capital to which the parent company is subscribed.
• Naturally, a branch is managed by the board of its foreign parent, whereas a subsidiary has its own board of directors. Naturally, it can be the same set of directors as that of the parent company.
• A branch doesn’t have its own financial accounts, and its financials are assumed into the financials of its foreign parent, so the latter will have to file its financials in the UK. A subsidiary, on the other hand, has its own accounts and does the filing itself.
• When a parent company ceases to operate in the UK, a branch automatically closes whereas closing a subsidiary requires a separate liquidation process.

Both types of entities will be subject to taxation:

• Corporation Tax fluctuates between 19 and 25% “depending on who wins the election.”
• Value Added Tax is chargeable on any supply of goods where a total supply of a subsidiary or a branch makes up GBP 85K per year.

The two types of entities are used for different reasons. Those willing to open a sales office in the UK without employing significant staff are best off with a branch. A more substantive presence requires a subsidiary. 

Directors and Shareholders

Importantly, the functions of directors and shareholders also differ in the UK. Directors are generally authorized to carry out all day-to-day actions on behalf of a company. Any limitations to that need to be explicitly specified in the company’s Articles of Association – or Shareholders’ Agreement in cases where a company has multiple shareholders, including investors.

The requirements for being a director in England and Wales don’t presuppose geographic limitations and are generally permissive. Typically, directors pass their resolutions in written form as opposed to offline or online meetings.

The directors’ actions are also limited by their duties imposed onto them by the shareholders. This leads to certain decision-making powers getting reserved by the shareholders. This includes settling any possible conflicts of directors, adjusting the overall course of the company, regulating the issuance of new shares, and removing directors. There are no requirements as to the regularity of the shareholders’ meetings, and they typically pass their resolutions in writing.

Filings and Regimes

Corporate filings in the UK have some peculiarities:

• A Confirmation Statement is a snapshot of various facts about the company at a specific date – usually one year after incorporation and on an annual basis afterward. The main information in the statement is the confirmation of shareholders.
• Accounts are also filed annually, but there is a possibility to extend or shorten the accounting period, but failure to file it in due time will attract vigilant attention of the Companies House.
• Ultimate beneficial owners of a company also need to be filed. These can be other entities and not necessarily individuals.
• General corporate filings need to be made whenever new shares are issued or any other changes are introduced to the share capital, directors, registered office addresses, and other similar developments. The term for such filings is 14-21 days.
• Naturally, Articles of Association also need to be filed publicly, as well as any changes to those Articles.

Altogether, the UK jurisdiction demands more public filings than the US. Notably, it doesn’t mean that all this information will be made publicly available – e.g. shareholders’ agreements and other shareholder-related information doesn’t get published. Same goes for accounts so long as the company doesn’t have too big turnover.

Overall, the UK government has been applying active effort to encourage a vibrant tech ecosystem. To assist that, certain regulatory regimes were created:

• Financial Conduct Authority (FCA) is a primary regulator for all FinTech, RegTech, and InsurTech. It enjoys the reputation of a progressive authority at the forefront of looking at crypto and DeFi, among other innovations, and encouraging businesses of that nature to incorporate and develop in the UK. The downside is a degree of regulatory overload that it creates.
• National Security & Investments has been in place since 2022 and broadens the scope of nuances that need to be looked at when it comes to direct foreign investments. It also covers M&A deals, inter-group transactions, asset transactions, as well as control in a wide sense. It deals with 17 sectors – from Defense Tech to AR and Advanced Robotics. Notably, it has a voluntary structure, i.e. the business must come to the authority itself and apply for approval, which shall be granted within 30 days.

Generally, the UK strives to be a welcoming jurisdiction for tech businesses. Among other aspects, it gets revealed through employment incentivization (EMI). Incentivizing employees with equity at the early stages adds to the tax efficiency of the employment. At that, the shares granted to the employees can be issued by a subsidiary as well as by a parent company of a branch.

Mr Pout adds that another aspect that makes the UK tech ecosystem particularly vibrant and attractive is its acceleration programs that can boast about the pan-European level, e.g. Accenture’s Acceleration Labs. Acceleration programs represent yet another option to consider for international startups aiming to set foot in the UK.

You are welcome to request the GOING GLOBAL: Factsheet for Tech Start-ups here.