General Topics

Expanding outside of the US


There are many ways to expand internationally. Successfully building a startup often means that global aspirations need to be built into the initial launch and marketing effort of a new business or product. Most startups are keenly aware that going global is not only good for business but often the only viable way to build a successful company. However, international expansion can have its own pitfalls—resources and cash are often strained and taking your eyes off the ball within the home market may lead to trying too much with too little, thereby diluting all efforts, and potentially leading to ultimate failure of the business. 

Companies initially often try to sell directly or license directly to end-users abroad. This is often a good launching pad and testing ground to see whether localization is necessary or required. Initial customer feedback is often invaluable for devising a good product roadmap and roll-out strategy. Another way to expand internationally is through third-party end-user sales. These third-party arrangements are in most instances accomplished through sales representatives, agents, commissionaires and distributors. Startups should be aware that distribution arrangements in foreign jurisdictions may be subject to different laws than ordinarily would be applicable in the United States, and need to be reviewed carefully. For example, the grant of an exclusive territory may be deemed to violate antitrust laws, and distributors may be entitled to compensation if a company determines to terminate a distributor other than for cause. Similarly, for companies with a franchising strategy, international franchise laws are often quite burdensome and a minefield for the unwary.

Many companies also look to expand into foreign jurisdictions to take advantage of cheaper labor or technological expertise that may not be available locally. In those instances, startups are confronted with (i) working with independent contractors or third-party development teams or (ii) working directly with team hires. Hiring employees abroad always requires a careful analysis as to whether doing so would make the company a so-called “permanent establishment” in any particular foreign jurisdiction, as a “permanent establishment” may subject the company to taxation in the applicable jurisdiction. 

In many instances, startups hire their first employees as sales representatives with little or no authority. However, if successful, the activities of the employees may quickly expand and registration of a branch or the establishment of a separate local subsidiary may become necessary. Larger structuring exercises include the establishment of off-shore holding companies as part of a broader tax planning exercise. In all these cases, startups need to carefully review mandatory contractual duration, removal and termination requirements under local laws that can be more expansive than in the US. Further, upon establishment of a subsidiary, startups need to consider entering into intercompany and cross-licensing arrangements. In each case, startups expanding abroad to increase sales need to tailor their approach by making sure these are best suited for penetrating the respective target markets.

In all these scenarios, protection of a startup’s intellectual property will play an integral part for purposes of analyzing and establishing the legal structure of any expansion. If expansion is the result of expanding the development team abroad these IP considerations are critically important. Making sure that foreign employees or contractors assign—in a legal and enforceable manner—all intellectual property created while working for, contracting with or advising the company is probably one of the most important considerations when working with either employees or contractors abroad.

Finally, a company planning to expand overseas, particularly a customer-facing company, needs to think carefully about protecting their trademark and brand before entering the market by filing local registrations and obtaining localized domain names for its local operations.