When GCs Need to Advise on International Expansion (and Alternatives to Incorporation)

TechGC
August 18, 2022

If you’re at a high-growth tech company, your team is likely engaged in multiple activities occurring at the same time that involve expansion. When does legal need to get involved and advise on – or even drive – your team’s strategy?

This topic was discussed during our recent Going Global Forum, where Sean Stenstorm of Palatir, Ananda Martin of Spire Global, Nina Fletcher of YipitData, and Vikram Paul of Spotdraft shared their insights. 

Below, we’ll provide an overview of activities that might activate legal department involvement, outline pitfalls your team should avoid, and offer some alternatives to incorporating a new entity. 

When Legal Needs to Jump In

Here are just a few of the reasons why GCs might need to become involved in their company’s global expansion efforts:

  • Sales wants to sell to customers internationally
  • Existing customer requirements (selling in local currency, establishing an entity to fulfill customer legal requirements, etc.)
  • Remote employee needs
  • Outsourcing business functions outside of your jurisdiction
  • Local government incentives (tax breaks, other government support)
  • Acquisition of an entity in another jurisdiction

While this isn’t an exhaustive list, this covers some of the most common reasons legal will need to jump in and contribute to or even lead strategy. 

Avoiding Potential Headaches and Pitfalls

Your company’s needs will vary depending on the size, stage, and objective of your expansion plans. However, there are a few steps you can take during every expansion project to make sure that your team is set up for success:

Create a Playbook

If you’re doing this for the first time with your company, take extensive notes of all the processes you’re going through and create checklists for all of the forms you need to complete. Additionally, make a record of all the key stakeholders that were needed during each step of the process along with their specific roles. 

As your company grows, you can continue to add to and update this playbook so that when you’re ready for another expansion project, you have a quick reference guide for all the steps you’ll need to go through as well as who you’ll need to work with across your organization. 

Make Sure You Understand the “Why”

Teams often get caught up in the excitement of international growth without understanding the key reasons or objectives behind the expansion.

Before putting pen to paper, make sure you have a good understanding of the business use case and goal of this expansion. Is the goal to recruit and hire within the jurisdiction? Closing a specific customer? If you aren’t able to clearly articulate the reasons, you’ll likely waste time and resources which will force you to course correct your strategy in the future.

Additionally, having a clear understanding of “why” will make it easier for you to understand what forms you’ll need to use and what – if any – type of outside counsel you’ll need to engage with.

Get Everyone to Agree on Cost

Does your team know the total estimated cost of expansion and establishing an entity? You need to have concrete numbers around how many people you’ll hire, how much time it will take, and how much money it will cost the business to engage in the expansion strategy. 

You might have to put on your “difficult lawyer” hat, but sometimes that’s what's needed to make sure your team isn’t underestimating the financial scope of the project.

What Triggers the Need to Incorporate?

Even if establishing an international entity isn’t on your roadmap, your company may inadvertently trigger the need to incorporate through one of the following actions: 

Business or Operational Triggers

This can occur if you’re laying the groundwork for future expansions by opening bank accounts, obtaining security clearances, or doing other administrative work. Additionally, you may need to establish an entity to fulfill international customer contractual requirements. 

Permanent Establishment

You likely already know that you have a tax liability and will need to set up an entity if you’ve signed a lease agreement. But what if you have a remote employee using WeWork or another unofficial office space?

In many cases, this can trigger permanent establishment, especially if they’re expensing the cost back to the company. 

You will also likely trigger permanent establishment if you have anyone in an outside jurisdiction signing contracts on your behalf. It’s usually a good idea to avoid this situation and have local employees sign contracts until you’ve fully established an entity.

Make sure you’re always reading treaties closely – sometimes even simply performing services in certain jurisdictions can trigger a permanent establishment.

Alternatives to Incorporation

Want to test the international waters before going all in? There are a few tried and true methods for operating in another country without fully establishing an entity. These allow you to test your business use case before investing the time and resources of multiple teams within your company. Below are a few options:

PEO Providers

These are organizations that act as an intermediary between the local country and your home jurisdiction. This is an easy way to meet some of the local requirements from a legal perspective without doing the work yourself. It's the lightest-touch method for expansion, as they are able to hire and manage employees while ensuring that all local requirements are being met.

Branch Offices 

Branch offices enable you to start selling in another jurisdiction without jumping through the hoops required to form a legal entity. Since you control this directly through your parent company, you don’t have to worry about dealing with a third party. 

Keep in mind that in some jurisdictions where you set up a branch, you may need to release company information (such as cap tables) to jurisdiction shareholders, board members, and others. If that’s not something you want to do, going with a PEO is likely your best bet. 

Other Options

In some cases, it makes sense to go the M&A route or work with joint venture partners, and in certain jurisdictions, business licenses even require a joint venture (an example of this is in China, where entities must be Chinese-owned).

Above all, realize that the work around international expansion isn’t obvious – it requires close analysis and working with local experts and outside counsel if you want to do it right. Doing your homework to fully prepare yourself and your team before jumping into a new market is key.

Want to learn from other GCs about international expansion? Apply to become a member of TechGC today. If you’re already a member, join us for the 2022 TechGC Euro Summit on October 13th and 14th in London.

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