U.S. Market Entry – Foreign Startups Coming to Silicon Valley

Silicon Valley is a magnet for foreign technology companies seeking to expand their offerings into the US market. As a San Jose-based attorney specializing in corporate law, I have seen an uptick in US-based management talent being solicited by foreign companies to help the companies start up their US operations. When faced with the question of what to do, many of the same issues arise in structuring the US market entry of foreign-owned companies.

The first issue is why the company is coming to the United States in the first place. If the company merely wants to sell widgets, it may be able to make do with a simple contractual relationship with a sales professional or distributor. If, on the other hand, the company wants to access US management talent and venture investors, it might look at reorganizing, or flipping-up, its legal headquarters into the US.

The second issue involves taxes. If the company is a mature company and expects to generate significant revenue from its US operations, there are a number of tax planning opportunities that may enable the company to minimize its international tax burden. Understanding the company’s existing structure and its goals, and designing an appropriate corporate and technology ownership and use structure is a necessary task. It can, however, be an expensive undertaking depending on the nature of the company and its products and services.

The third issue involves the need to allocate resources to basic housekeeping. For example, it is surprisingly time consuming for a foreign company to open a simple bank account. This is because an account will require, among other things, a Federal Employer Identification Number, and the IRS will require that an individual provide some form of US-recognized personal tax number. Although this is easy for a US citizen with a social security number, it is more difficult for a company with no US contacts. A foreign company will usually need to coordinate the filing with the IRS to determine precise requirements, and its own foreign agencies to secure the necessary documentation to satisfy IRS requirements.

Another important housekeeping task is assembling the necessary team of advisors. If the foreign company hopes to enter the market through a sales representative or distributor, its group of professional advisors can be limited to an attorney and an accountant. If the entry strategy is more involved, the advisor group will likely extend to international tax professionals and bankers, among others.

The fourth common issue is making sure the foreign company understands the dynamic US business culture, especially here in Silicon Valley, and the rapid swings prompted by the business cycle. Many foreign companies are enamored with the potential market size of the United States, but may not have the stomach for the roller coaster life of a US technology company. Any entrepreneur working with a foreign company must probe beyond the usual discussions to determine the amount of funding and other resources that the foreign company is willing to devote to the effort, and whether that funding will be provided all at once, or dripped over time.

The Silicon Valley area will continue to attract foreign technology companies hoping to establish a beachhead in the US marketplace. In an upcoming blog, I’ll discuss the legal structures that are often used in US market entry.
The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific Questions relating to this article should be addressed directly to the author.

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