How International Startups Can Move to Silicon Valley

© 2020 Haynes and Boone, LLP
How International Startups
Can Move to Silicon Valley
Idea to IPO
Roger Royse, Partner
Virginia Slutu, Counsel
Haynes and Boone, LLP
Palo Alto, CA

Roger Royse
Partner
roger.royse@haynesboone.com
T +1 650.687.8820
F +1 650.687.8801
525 University Avenue
Suite 400
Palo Alto, CA 94301
Roger Royse is a partner in the
Palo Alto office of Haynes and
Boone, LLP and practices in the
areas of corporate and securities
law, domestic and international
tax, mergers and acquisitions,
and fund formation. He works
with companies ranging from
newly formed tech startups to
publicly traded multinationals in a
variety of industries.
Roger is a Fellow of the
American College of Tax Counsel
and former chair of several
committees of the American Bar
Association Sections of Business
Law and Taxation. Roger has
been an instructor or professor of
legal, tax and business topics for
the Center for International
Studies (Salzburg, Austria),
Golden Gate University School of
Law and Stanford Continuing
Studies.
Roger is a nationally recognized
authority on agtech – the
technology of food production -
and the legal considerations for
companies in this industry. Roger
is also the author of Dead on
Arrival: How to Avoid the Legal
Mistakes That Could Kill Your
Startup and has been interviewed
and quoted in the Wall Street
Journal, Forbes, Fox Business,
Chicago Tribune, Associated
Press, Tax Notes, Inc. Magazine,
Nikkei Asian Review, China
Daily, San Francisco Chronicle,
Reuters, The Recorder, 7X7,
Business Insurance and Fast
Company.
Roger is also a Certified Public
Accountant (California non-
Attest).
PRACTICES AND INDUSTRIES
 Emerging Companies and
Venture Capital
 Corporate
 Mergers and Acquisitions
 Capital Markets and
Securities
 Fund Formation and
Management
 Tax
 Corporate Tax
 International Tax
 International
 Investment Management
 Fintech Virtual Currency
and Blockchain
 Industries
 Medical Device and
Technology
 Agriculture Technology
EDUCATION AND CLERKSHIPS
 LL.M., Taxation, New York
University School of Law
 J.D., University of North
Dakota
 B.S., Accounting, University
of North Dakota
BAR ADMISSIONS
 Nevada
 California
 New York
 Minnesota
 South Dakota
 North Dakota

Virginia Slutu
Counsel
virginia.slutu@haynesboone.com
T +1 650.687.8806
F +1 650.804.8706
525 University Avenue
Suite 400
Palo Alto, CA 94301
Virginia Slutu is a licensed attorney in
California and France (Barreau de Paris). She
advises startups and investors on a wide
range of corporate matters covering startup
formation, fund formation, funding, and
corporate maintenance. She also focuses on
transactional matters, strategic alliances, and
commercial agreements. She has performed
legal work on more than $1 billion worth of
contracts.
Moreover, she advises clients on US and
European regulatory compliance matters and
corporate legal strategy.
Virginia has distinctive international
background and experience, and is particularly
versed in advising international clients. Prior to
joining Haynes and Boone, Virginia was an
attorney with Royse Law Firm. Additionally,
she previously ran her solo practice in San
Francisco advising clients on corporate and
transactional matters. Before that, she worked
in-house on legal and transactional issues in
the aerospace industry, both in France and the
United States. She received law degrees from
top law schools in France, Australia, and the
U.S.
She regularly speaks about startup formation,
funding, and trends in Silicon Valley.
PRACTICES AND INDUSTRIES
 Corporate
 Capital Markets and
Securities
 Mergers and Acquisitions
 Regulatory Compliance
 Fund Formation and
Management
 International
 Emerging Companies and
Venture Capital
EDUCATION AND CLERKSHIPS
 LL.M., American Law,
Vermont Law School
 Master of Law, La Trobe
University
 Master of Business Law,
Cergy-Pontoise University
BAR ADMISSIONS
 California
 Paris, France

 Headquarters to Top Tech companies ($6 trillion)
 Home to the $100 Billion US venture capital industry
 Top tech talent

5

6

7
7
US Business
Liability Protection
Privacy Intellectual
Property
Transfer Pricing
Employment and
Immigration
Corporate
Tax
Regulatory

8
8
US Business
Cap Table Mgmt
Insurance Banking
State taxes
Lease space
CPA (tax returns)
Payroll & Benefits
CFO, accounting
and bookkeeping

9
U.S. Branch U.S. Incorporation
Foreign Entity
U.S. Branch
Foreign Entity
U.S. Subsidiary

10
Delaware
Nevada
California
vs.
vs.

Which one is right for you?
 Limited Liability Company (LLC)
 Limited Partnership (LP)
 C Corporation
 S Corporation
 Statutory Trust
11

 Talent
 Markets
 Money
12
Parent
Company

13
Foreign Co
(ForCo)
DomCo Stock
ForCo Stock
Shareholders
ForCo
Shareholders
USA, Inc.
(DomCo)
USA, Inc.
(DomCo)
Forco’s shareholders create a new US entity (“Domco”) and exchange their Forco
stock for Domco stock. After the exchange, the shareholders will own Domco, and
Domco will own Forco. Investor invests into Domco.

 Practical non-legal considerations
 What do your targeted investors want?
 Why is it important to understand who your
investors are?
 Prepare your team
 Prepare your documents
 Cap Table
 Common, option pool, warrants,
convertibles
 Financing rounds
 F&F, Angel, Pre-Seed, Seed,
Series A
 Vesting
 Control
 Board representation
 Protective provisions
 Drag and Cosale
 Economic Terms
 Participation
 Preferences
 Redemption rights
 Consider alternative financing options
14

15
Open Competition vs. Consumer & Employee Protection
Interstate Commerce vs. Intrastate Commerce

 Securities and Exchange Commission: securities laws
 Consumer Product Safety Commission (CPSC): federal safety standards
 Environmental Protection Agency (EPA): pollution standards
 Equal Employment Opportunity Commission (EEOC): fair employment
 Federal Communications Commission (FCC): interstate and foreign
communication by radio, telephone, telegraph, and television
 Federal Trade Commission (FTC): unfair or deceptive practices
 Food and Drug Administration (FDA): federal food purity laws, drug testing
and safety, and cosmetics
 Interstate Commerce Commission (ICC): transportation that crosses state
lines
 National Labor Relations Board (NLRB): unfair labor practices
 Occupational Safety and Health Administration (OSHA): federal standards
and regulations ensuring working conditions
16

 California Consumer Privacy Act
 COPPA
 Privacy Policies
 Terms of Service
17

 Tax Accounting
 Financial Accounting
18

 Secondment Agreement
 Limitations on Authority
 Tax Withholdings
 Tax Gross-Ups
 Totalization
19
Fee Employees
Services
Parent
Company

 VISA Requirement
 Non-Resident Alien or Resident for Tax
 Green Card
 Substantial Presence Test
 Treaty Definitions
 Estate and Gift Tax
 Domicile
20

 AB5
 PAGA
 Minimum wag, overtime, breaks, waiting time, attorneys fees
 Tax withholding
21

 Minimum Wages & Maximum Hours
 Non-Discrimination
 Pension Rights – ERISA & Social Security
 Health and Safety
 Unemployment
 Sexual Harassment
 Mass Layoffs (WARN Act)
 Arbitration
22

 Equity compensation
 Stock option plans
 RSUs, ISOs, Phantom stock
 Foreign employees/US company
 US employees/foreign company
23

 Worker Flexibility and Small Business Protection Act (S.4738) creates an ABC
test with no exemptions
 “An individual performing any labor for remuneration shall be considered an
employee and not an independent contractor, unless—(A) the individual is free
from control and direction; (B) the labor is performed outside the usual course of
the employer’s business; and (C) the individual is customarily engaged in an
independently established business.”
24

Employee Misclassification generally
 Prior Employee Misclassification Prevention Act and Payroll Fraud Prevention
Act under Obama-Biden
 Biden plan equates gig economy workers with misclassification
 Misclassification deprives workers of legally mandated benefits and
protections
25

 Trademark
 Copyright
 Patent
 Trade Secret
26

27
 Novel, non-obvious processes, machines, articles
of manufacture and compositions of matters.
 Good for 20 years from the date of the
application.
Highly complex prosecution process between
inventor and Patent Examiner determines the
breadth of patents. Patent application requires the
known embodiments of the invention and its best
mode with sufficient detail to permit one “skilled in
the art” to make the invention.

28
 Protects the “ornamental” features (i.e. the way a
product looks)
 Good for 14 years from the date of issuance
 Are design patents similar to trade dress
(trademarks) or copyrights?
 Why choose to protect rights with trademark or
copyright in lieu of design patent?

29
 Literary, musical, dramatical, pictorial, graphic,
sculptural, motion picture and audio visual
works, sound recordings, architectural works and
computer software.
 Copyrights last for the life of the author plus 70
years. For works which are psuedonymous or
works for hire (e.g. movies ) they last 95 years
from first publication or 120 years from the date
of creation, whichever occurs first.
Protects works that are original works of
authorship fixed in any tangible medium of
expression.

30
 Rights are created through use.
 Federal registration is not required but offers substantial
advantages.
 Nationwide rights and presumption of validity
“strengthen” rights.
 Trademarks have the potential to last forever provided they
are continually used. Federal registrations must be
renewed every ten years.
Word, symbol, sound or device which is used with a good or service
to identify a particular source.
>> e.g. Logos, and slogans...even designs such as the shape of
the Coca Cola bottle or the design and look of a McDonalds
restaurant can serve as trademarks.

31
 The Uniform Trade Secrets Act ("UTSA") defines a "trade secret" as:
"information, including a formula, pattern, compilation, program, device, method,
technique, or process that:
 Derives independent economic value, actual or potential,
 from not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its disclosure or
use; and
 Is the subject of efforts that are reasonable under the circumstances to maintain its
secrecy.

 Cross border trade secrets
 Patents
 Marks and Logos
 Data
32

 Sales Agent
 Distributor Agreement
 Reseller Agreement
 License Agreement
 Joint Venture
 Partnerships and strategic alliances
33

 Common Business terms:
 Territory
 Exclusivity
 Compensation
 Payment
 IP Ownership
 Indemnity
 Warranties
 Remedies
 Law and Jurisdiction
34

 Shipping Terms
 Payment Terms
 Risk of Loss & Title Passage
 Insurance
 Most Favored Nation Clauses
 Price Protection
 Indemnity
 Warranty
 Trademarks & Marking
35

 Venture Capital investment in foreign startups
 The magical Delaware corporation
 Investment vehicles
 Convertible Notes
 SAFEs
 Series Seed
 Preferred Stock
 Royalty Financing
 Tokens
 Alternative investments
36

Ownership Through Foreign Corp.
37
Foreign Person
Foreign Corp.

Ownership Through U.S. Corp.
38
Foreign Person
U.S. Corp.

Ownership Through Foreign Corp. and U.S. Corp.
39
Foreign Person
Foreign Corp.
U.S. Corp.

Direct Ownership
40
Foreign Person

Ownership Through U.S. LLC or Foreign LLC
41
Foreign Person
U.S. or Foreign
LLC

42
Fund
(Delaware Series LLC)
SPV
(Series I)
SPV
(Series II)
SPV
(Series III)
Real Estate
Asset 1
Real Estate
Asset 2
Real Estate
Asset 3
Chinese E-
Commerce
Company/other
owners of the
Management
Company
Management
Company
(Delaware Corporation)
Chinese LPs
US LPs
Cayman Corporation
(for US tax purpose)
Blocker
Carried Interests
means pass-through entity
for US tax purpose
means corporation that subject
to 21% US tax (federal)
means individual
represents legal ownership
represents fund flow

43
LPs
Investments
GP
Fund
(Delaware LP/LLC)
General
Partner
(Delaware LLC)
Sponsor Sponsor
LP
U.S. Taxable
Investors
LPs
Offshore Feeder
Companies
(“Blockers”)
Non-U.S. and Tax-
Exempt Investors
• Management Fee
• Carried Interest
GP

 Dividend
 Interest
 Royalties
 Service Income
44

 Permanent Establishment Required for Tax on Business Profits
 Information Exchange
 Competent Authority
 Non Discrimination
 Limitation of Benefits
45

 Code section 482
 “Controlled" entities
 Arm's length standard
 Understatement penalties – 20% or 40%
 Adequate documentation (i.e. a transfer price study)
46

 Buy Sell
 Just-in-Time Inventory
System
47
U.S. Customers
U.S. Profit
$ Products
Services
$
Parent
Company

48

49
 Deferral
 Worldwide Tax Rate
 Withholding Tax Issues

50

51

 Debt
 Deductible interest, but must pay or accrue
 Must be repaid
 “Deep Rock Doctrine”
 Equity
 Not required to be repaid
 Dividends are nondeductible
 Thin Capitalization Rules
 Earnings Stripping
52
$
Debt
Equity
Parent
Compan
y

 Loans from the foreign parent to the U.S. Subsidiary requiring the payment of
deductible interest back to the foreign parent
53

54

55

 A foreign (non-California) corporation may not transact intrastate business in
California without first qualifying with the California Secretary of State.
 Some California laws only apply to entities that are doing business in California, such
as California’s privacy laws.
 Transacting intrastate business means entering into repeated and successive
transactions of its business in the state, other than interstate or foreign commerce.
Generally, intrastate business may be indicated by having a California office, locating
servers in the state, conducting banking in the state or having employees in
California is probably transacting intrastate business.
 A foreign corporation that is required to qualify but does not may be subject to a
penalty of $20 for each day that unauthorized interstate business is transacted. The
corporation may not maintain any action or proceeding in any California court upon
any intrastate business transacted in California until it has complied with the
qualification requirements and paid applicable penalties
56

 Income Tax Presence
 Sales Tax Nexus
 Economic Nexus
 Click through nexus
57

Any company that is doing business in California is subject to California tax laws. A
company is considered to be “doing business” if it meets any of the following:
 Engage in any transaction for the purpose of financial gain within California
 Is organized or commercially domiciled in California
 Its California sales, property or payroll exceed the amounts (for 2019):
 CA sales exceed $601,967 or 25% of total sales
 CA real and tangible personal property exceed $60,197 or 25% of total
property
 CA payroll compensation exceeds 60,197 25% of total payroll.
 A company that is doing business in California must apportion its trade or business
income based on an apportionment factor formula. The company must also allocate its
non business income to a particular state.
58

 Every retailer engaged in business in California and making sales of tangible personal
property for storage, use, or other consumption in the state (unless exempt) must
collect sales and use tax on its taxable sales. A retailer is engaged in business if it has
substantial nexus with California.
 While a company may be required to file a sales and use tax return, it may qualify for
sales tax exemptions or rate reductions provisions depending on the types of
transactions involved. C
 California may hold the officers of a company personally liable for the sales and use
tax owed by the company.
59

 Finally, a foreign company may be subject to California law or the jurisdiction of a
California court because it has consented to be subject to a state’s laws, or the party has
certain “minimum contacts” with the state.
 Overall, a state court can only enforce a state’s laws if it has either “general”
jurisdiction or “specific” jurisdiction over a company. General jurisdiction means that the
court in said state can hear any case related to the company. Specific jurisdiction can be
exerted by a state other than the “home” state of the company if the claims being
brought up against the company are related to the company’s contact with that state
60

61
Roger Royse, Partner
+1.650.687.8820
Roger.Royse@haynesboone.com
Virginia Slutu, Counsel
+1.415.293.8921
Virginia.Slutu@haynesboone.com

62
Dead on Arrival: How to Avoid the
Legal Mistakes That Could Kill Your
Start-Up.
This book outlines the legal mistakes
that start-up companies and their
lawyers make on their way to success
and how to avoid making those
mistakes. Some of those mistakes can
be rectified, but many will result in your
start-up company being Dead on
Arrival when it looks for financing or
acquisition opportunities. Knowing
what those mistakes are and how to
avoid them is essential to starting and
building a successful company. This
was published in 2012 and is available
in both print and audio formats.

How International Startups Can Move to Silicon Valley

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