Legal errors of IT projects when entering the US market
From an idea to a successful business, there is a long and difficult path with mistakes, losses, conflicts and the right choice at every important turn. One of the most important aspects of a business is its legal support, and for this the mere knowledge of the entrepreneur and his general (and often lethal) knowledge is not enough. His opinion is shared by the speaker ISDEF2018 Dmitry Dubograev, founder and managing partner of the law firm femida.us
The system of law and practice of the United States is multifaceted and requires professional skills and practice. In the field of law, there are especially many subtleties, details, consequences and nuances that are not obvious to the unprofessional eye, therefore in the United States not a single serious business, and even more so a business that is based on intellectual property, does not work without a lawyer.
When entering the US market, Russian IT companies often think that they can resolve all issues on their own, based on common knowledge and personal experience, using “specialists” who do not have a US lawyer’s license. If you do not know how to fly on an airplane, then the erudition does not save you, and the amateurish approach often costs Russian entrepreneurs time, money, and sometimes the business itself.
It would seem that the described cases and errors are inherent only in startups, but, unfortunately, this is not so. Even large Russian companies (in the USA they are known as “small” and “medium”) are trying to copy their Russian experience and administrative resources onto American soil and, again, meet with unforeseen consequences. DDoPitzza shared its experience of registering a company in the United States , which after its misadventures came to us for help. This article honestly describes the possible “pitfalls” of starting a business in America and why the initial “savings” then cost several times more.
The legal basis of the company, agreements between founders, clear rules of the game with investors, the choice of a place for registration, the design of the foundation are protected by intellectual property, including the choice and registration of a trademark and name - this is what should be done at the very beginning. It is almost impossible or, in any case, expensive and fraught with internal conflicts and sometimes loss of business or competitive advantage, making changes “later” (the usual wish of the Russian speakers). Therefore, it is important from the very beginning to competently build working and predictable legal relations between the founders-partners of a business. How stable the legal architecture of a business is in the long term is just as important as product development.
Lawyers have an unspoken rule that you can talk about clients either well or nothing. It should be noted that most of our clients can, without false modesty, be proud of the successful experience of starting and running a business in the United States. However, there are cases when clients, seeking the advice of lawyers, have time to "nakhimichit" in such a way that the necessary efforts of lawyers increase significantly. What aspects, in the first place, should you pay attention to when deciding to open a company in the USA?
The difficulties start from the very beginning: you need to choose the place of registration, the legal form of the company, define the “rules of the game” for the future company, protect the name and trademark. Even problems with the name of the company cause disasters: some companies choose (sometimes deliberately, sometimes unintentionally) the brands of large companies and then they are surprised that Apple does not miss their app in the AppStore or the owners of a similar name close their websites or sales channels. Others, not understanding the nuances of the language, use words in the name that are not very biased or obscene: “BS” in English is a steady curse (those who watch American films will understand) does not mean best software, and even if the word study (learn) it seemed to you too long, and you shortened to stud ("stallion", "dog"), then you dramatically changed the perception of your company's profile with consumers. That is, if such problems arise with the first registration line, then you can imagine what is happening with the text of contracts for such “DIY”.
Choosing where to register a company should be based on corporate state laws, court efficiency, the friendliness of the business and legal environment of the state for business, the concentration of investors and the necessary human resources, and the “proximity” of consumers of your future product. When thinking about choosing a place of company registration, it is important to immediately prioritize correctly. For example, unduly great importance is given to the nominal figures of state taxes, while the relative cost of resources, the costs inherent in this state and the difficulties with logistics can be fatal. That is why states with the seemingly lowest tax rate are often the most resource-intensive from a business point of view. The dream of almost every Russian IT company is to open its business in Silicon Valley. However, starting to study this issue in more detail, the landowners-owners come to the conclusion that almost all business expenses and salaries are doubled and California Dreaming becomes irrelevant. Therefore, on Google you can find numerous links where Sergey Brin does not recommend starting a business in the United States from California.
For Russians, it has become fashionable to do registration in Wyoming - and then the founders understand that it is impossible for them to remotely control and find cowboys in Wyoming who would know and understand that in order to transfer money to Russia, an “acceptance certificate” is needed. The magic place in which everything will be equally good, unfortunately, does not exist. Trying to save with the wrong priorities, you put yourself in a very high probability of killing the future of the project and hopes for financing or real growth.
Even choosing a form of registration of a legal entity is often a problem. There are two main types: corporation and LLC. Despite the fact that Limited Liability Company (LLC) seems to be similar to a Russian LLC, that is, a separate legal entity is created, as it were, in a simplified way, which is independently responsible for debts. However, with a more detailed approach, it turns out that this form is not always suitable for Russian IT specialists, because if an LLC, for example, was going to be one of the creators - a non-resident of the USA - then imputed (that is, regardless of the actual payment of "dividends" to the owner, but only on the basis of the company's earned income) taxes on non-residents may amount to an unreasonably high tax rate. For example, one of the software companies that approached us post-factum, chose LLC as a legal entity form,
In the US, two types of company registration can be divided. The first is the metric, the “birthplace” of the company. The second is “qualification to do business” or a certain business “registration”. For the “place of birth”, you need to choose states with a good corporate code: for example, Virginia - it has the fastest courts and the most advanced, according to Forbes rating, legal environment, or Delaware, Washington, North Carolina, Florida. On the other hand, while in Texas there is also a good legal basis, this state is too favorable to patent trolls (most of the trolls are suing it in Texas and for IT companies this translates into huge costs) - and there are a lot of such subtleties in different states ... Corporate Code is considered to be the Delaware, but for Russian entrepreneurs this is far from always the best choice, since Delaware is unjustly branded as offshore, and with Delaware companies there are many problems with financial transactions in the Russian Federation. In addition, the Delaware often turns into an unnecessarily expensive option (with a large number of shares, the registration fee can be up to $ 180,000 per year).
Avoiding irreparable mistakes in the foundation of a business will be helped by the advice of a trusted attorney who understands the nuances and can reflect exactly your business and your priorities in the legal structure, especially if you are set up for serious growth, scaling and investment. It is clear that not all legal tasks can be enough bootstrapping money, but you need to understand that protection must be adequate to the value of the project and you need to think about it in advance.
Otherwise, often with the Russian-speaking this situation is obtained, which is reflected in a slightly late dialogue (slightly changed for the purposes of anonymity):
The system of law and practice of the United States is multifaceted and requires professional skills and practice. In the field of law, there are especially many subtleties, details, consequences and nuances that are not obvious to the unprofessional eye, therefore in the United States not a single serious business, and even more so a business that is based on intellectual property, does not work without a lawyer.
When entering the US market, Russian IT companies often think that they can resolve all issues on their own, based on common knowledge and personal experience, using “specialists” who do not have a US lawyer’s license. If you do not know how to fly on an airplane, then the erudition does not save you, and the amateurish approach often costs Russian entrepreneurs time, money, and sometimes the business itself.
It would seem that the described cases and errors are inherent only in startups, but, unfortunately, this is not so. Even large Russian companies (in the USA they are known as “small” and “medium”) are trying to copy their Russian experience and administrative resources onto American soil and, again, meet with unforeseen consequences. DDoPitzza shared its experience of registering a company in the United States , which after its misadventures came to us for help. This article honestly describes the possible “pitfalls” of starting a business in America and why the initial “savings” then cost several times more.
The legal basis of the company, agreements between founders, clear rules of the game with investors, the choice of a place for registration, the design of the foundation are protected by intellectual property, including the choice and registration of a trademark and name - this is what should be done at the very beginning. It is almost impossible or, in any case, expensive and fraught with internal conflicts and sometimes loss of business or competitive advantage, making changes “later” (the usual wish of the Russian speakers). Therefore, it is important from the very beginning to competently build working and predictable legal relations between the founders-partners of a business. How stable the legal architecture of a business is in the long term is just as important as product development.
Lawyers have an unspoken rule that you can talk about clients either well or nothing. It should be noted that most of our clients can, without false modesty, be proud of the successful experience of starting and running a business in the United States. However, there are cases when clients, seeking the advice of lawyers, have time to "nakhimichit" in such a way that the necessary efforts of lawyers increase significantly. What aspects, in the first place, should you pay attention to when deciding to open a company in the USA?
The choice of location (and the accompanying legal framework) for blind registration
The difficulties start from the very beginning: you need to choose the place of registration, the legal form of the company, define the “rules of the game” for the future company, protect the name and trademark. Even problems with the name of the company cause disasters: some companies choose (sometimes deliberately, sometimes unintentionally) the brands of large companies and then they are surprised that Apple does not miss their app in the AppStore or the owners of a similar name close their websites or sales channels. Others, not understanding the nuances of the language, use words in the name that are not very biased or obscene: “BS” in English is a steady curse (those who watch American films will understand) does not mean best software, and even if the word study (learn) it seemed to you too long, and you shortened to stud ("stallion", "dog"), then you dramatically changed the perception of your company's profile with consumers. That is, if such problems arise with the first registration line, then you can imagine what is happening with the text of contracts for such “DIY”.
Choosing where to register a company should be based on corporate state laws, court efficiency, the friendliness of the business and legal environment of the state for business, the concentration of investors and the necessary human resources, and the “proximity” of consumers of your future product. When thinking about choosing a place of company registration, it is important to immediately prioritize correctly. For example, unduly great importance is given to the nominal figures of state taxes, while the relative cost of resources, the costs inherent in this state and the difficulties with logistics can be fatal. That is why states with the seemingly lowest tax rate are often the most resource-intensive from a business point of view. The dream of almost every Russian IT company is to open its business in Silicon Valley. However, starting to study this issue in more detail, the landowners-owners come to the conclusion that almost all business expenses and salaries are doubled and California Dreaming becomes irrelevant. Therefore, on Google you can find numerous links where Sergey Brin does not recommend starting a business in the United States from California.
For Russians, it has become fashionable to do registration in Wyoming - and then the founders understand that it is impossible for them to remotely control and find cowboys in Wyoming who would know and understand that in order to transfer money to Russia, an “acceptance certificate” is needed. The magic place in which everything will be equally good, unfortunately, does not exist. Trying to save with the wrong priorities, you put yourself in a very high probability of killing the future of the project and hopes for financing or real growth.
Even choosing a form of registration of a legal entity is often a problem. There are two main types: corporation and LLC. Despite the fact that Limited Liability Company (LLC) seems to be similar to a Russian LLC, that is, a separate legal entity is created, as it were, in a simplified way, which is independently responsible for debts. However, with a more detailed approach, it turns out that this form is not always suitable for Russian IT specialists, because if an LLC, for example, was going to be one of the creators - a non-resident of the USA - then imputed (that is, regardless of the actual payment of "dividends" to the owner, but only on the basis of the company's earned income) taxes on non-residents may amount to an unreasonably high tax rate. For example, one of the software companies that approached us post-factum, chose LLC as a legal entity form,
In the US, two types of company registration can be divided. The first is the metric, the “birthplace” of the company. The second is “qualification to do business” or a certain business “registration”. For the “place of birth”, you need to choose states with a good corporate code: for example, Virginia - it has the fastest courts and the most advanced, according to Forbes rating, legal environment, or Delaware, Washington, North Carolina, Florida. On the other hand, while in Texas there is also a good legal basis, this state is too favorable to patent trolls (most of the trolls are suing it in Texas and for IT companies this translates into huge costs) - and there are a lot of such subtleties in different states ... Corporate Code is considered to be the Delaware, but for Russian entrepreneurs this is far from always the best choice, since Delaware is unjustly branded as offshore, and with Delaware companies there are many problems with financial transactions in the Russian Federation. In addition, the Delaware often turns into an unnecessarily expensive option (with a large number of shares, the registration fee can be up to $ 180,000 per year).
Avoiding irreparable mistakes in the foundation of a business will be helped by the advice of a trusted attorney who understands the nuances and can reflect exactly your business and your priorities in the legal structure, especially if you are set up for serious growth, scaling and investment. It is clear that not all legal tasks can be enough bootstrapping money, but you need to understand that protection must be adequate to the value of the project and you need to think about it in advance.
Otherwise, often with the Russian-speaking this situation is obtained, which is reflected in a slightly late dialogue (slightly changed for the purposes of anonymity):
[7/18/17, 3:34:07 PM] Dmitri I. Dubograev (femida.us): and what is the ownership agreement?It is easy to predict the disastrous consequences of such a “business”. Slightly paraphrasing a well-known expression - you can save money on a doctor and a lawyer if you are not interested in the final result.
[7/18/17, 3:34:19 PM] ClientA: Oral
[7/18/17, 3:34:30 PM] Dmitri I. Dubograev (femida.us): and the representative in the company is "someone" even verbally
[7/18/17, 3:34:42 PM] ClientA: It’s like a partner, but not officially fixed
[7/18/17, 3:35:34 PM] Dmitri I. Dubograev (femida .us): “Well, I’m kind of a Nobel laureate, only nowhere is this reflected on paper” :-)
[7/18/17, 3:35:53 PM] ClientA: Like this)
[7/18/17, 3 : 36: 05 PM] Dmitri I. Dubograev (femida.us): what percentage of a partner?
[7/18/17, 3:36:36 PM] ClientA: I don’t know for sure, I suspect that the floating
[7/18/17, 3:37:02 PM] ClientA: I don’t know the exact conditions, but you can write it somewhere if necessary
[7/18/17, 3:40:13 PM] Dmitri I. Dubograev (femida .us): well, that is, he owns or whether 1 percent of the company is 99, let's start with that.
[7/18/17, 3:43:00 PM] ClientA: No, not exactly 99. I would not call it a possession, but he has only access to the accounts and he does not provide us with reports ...