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PostedForeign startup, US venture capital, and taxation
Phil Hodgen
Attorney, Principal
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I like Hacker News. Let's just say that I spend too much time there. Shout-out to Ronnie Roller and his iHackernews site, because mostly I look at HN on my iPhone. I lurk mostly, and comment infrequently. It's recreational for me. I am username = philiphodgen there, FWIW.I got an email overnight from a HN community member asking me a question and I thought it would be worth sharing the question (suitably disguised) and my answer.Warning to my correspondent: the answer here on the blog is far better because the email I sent you was done in the early morning on my iPhone. That's not conducive to clear thinking and clean prose. :-) Now I'm sitting in front of an iMac and writing inside MarsEdit.
Question
The question from my correspondent:Does a mobile software startup with Asian R&D operations and a US sales force targeting the US market require a US holding company to attract US VC funds or is a [Country] holding company acceptable? The company's resources are split between US and Asia. Thanks.
VCs and self-inflicted brain damage
There are two things hiding in this question. The first is the question of attracting VC money.That's a simple thing to handle. "When Mama's happy, everybody's happy." Except for the exceptionally well-informed VC, they're going to see brain damage if you ask them to buy into a company organized and operating outside the United States.The purpose of putting money into a deal is to (eventually) get money out of the deal. Understanding how to do that is difficult even when you are living in California and investing in a start-up in California. So imagine what happens when you add variables to the investment decision:- You (the VC) can't jump in a car and go meet with the founders to see how things are going. This is not fatal, but all else equal, you'd rather be able to keep tabs on your deals, right?
- You (the VC) don't intuitively understand the corporate laws of the other country so you don't know exactly what you're buying into when you get shares of a foreign corporation. And you don't have a trusted, experienced lawyer that you know to give you advice, so you have to shop for someone new. More expense, more delay, more uncertainty.
- You (the VC) don't exactly know how to handle cashing out in the future, assuming the start-up flourishes. The doorways to a successful start-up exit are pretty well marked in the USA. The doorways probably look pretty similar in other countries, but there is some nagging uncertainty in your (the VC's brain).
"Why should I fly 10,000 km to lose money when I can lose money at home?"It's a fair point.
Taxation
The second thing hiding in this question is the question of taxation. How will this mobile software venture be taxed? Look at this from two perspectives:- How and where will the business profits be taxed? and
- If there is a successful exit for this start-up (a publicly traded company comes running with fistfuls of $100 bills) how and where will that be taxed?