The document provides an overview of essential startup components, including the importance of money, people, and technology in Silicon Valley. It discusses various funding sources, equity structures, technology strategies, and legal considerations for international business operations, particularly focusing on U.S.-China tax implications. Additionally, it highlights the roles of legal support and networking through the Royse Law Firm and related initiatives in fostering innovation and entrepreneurship.

1. Startup Basics:
Money, People and Technology
Silicon Valley, San Francisco, Los Angeles
rroyse@rroyselaw.com
www.rroyselaw.com

2. Roger Royse is the founder of the Royse Law Firm. Based
in Silicon Valley, the Firm works with companies in a
variety of industries, including clean tech, internet, life
sciences, entertainment and new media, sports, real
estate, retail and mobile devices and applications.
Practicing business and tax law since 1984, Roger’s
background includes work with prominent San Francisco
Bay area law firms as well as Milbank, Tweed, Hadley
and McCloy in New York City.
Roger has also served as an adjunct professor at the
Gold Gate University Masters of Tax program. He is a
frequent speaker, writer and blogger for American bar
associations, CPA organizations, and business groups.

3. THE STARTUP TRIANGLE
PEOPLE
MONEY
TECHNOLOGY

4. TECHNOLOGY - IP
• Trade Secret
• Patent
• Trademark
• Copyright

5. TECHNOLOGY – IP STRATEGY
• Joint Venture
• Joint Development
• License
• Manufacture

6. CASHFLOW COMPARISON:
LICENSING VS. MANUFACTURING
POSITIVE
CASHFLOW
NEGATIVE
CASHFLOW
IDEA GENERATION DEVELOPMENT COMMERCIALIZATION SALES / REALIZATION
PRODUCT LAUNCH
MANUFACTURING
L.ICENSING

7. TECHNOLOGY STRATEGY
Market Entry
Options
Third Party
Presence
Sales Rep
Distributor
OEM/VAR
Direct
Presence
Branch
Office
Subsidiary

8. PEOPLE - FOUNDER’S EQUITY
 Dynamic Split
 Equal Percentages
 Subjective
 Formula

9. Dynamic Split

10. Grunt Fund
Source: http://www.slicingpie.com/the-grunt-fund-calculator/

11. Grunt Fund Detail
Source: http://www.slicingpie.com/the-grunt-fund-calculator/

12. PEOPLE - ADVISOR
FAST Model
Valuation
Milestones and
Deliverables
Vesting Stock v.
Options

13. www.startuprounds.com
 Who should vest
 How long?
 Acceleration?
 Change of control
 Termination without cause
 Double and single triggers
VESTING

14. Source: Founder Institute. http://fi.co/contents/fast#

15. Source: Founder Institute. http://fi.co/contents/fast#

16. ADVISOR CURRENCY
• Options
• RSUs
• Restricted Stock
• Phantom Plan Units

17. MONEY - EARLY STAGE FUND SOURCES
• Founders
• Family & Friends
• Angel Investors
• Private Equity Funds
• Banks
• Venture Capitals

18. MONEY - SEED FUNDING
SAFE Priced roundsConvertible Debt

19. VENTURE CAPITAL

20. PwC Money Tree

21. PwC Money Tree

22. PwC Money Tree

23. PwC Money Tree

24.  VC or Institutional Investor
 Preferred Stock
 Valuation Methods
 Score Card
 Venture Capital Method
 Berkus Method
 Cayenne Calculator
 Risk Factor Summation
 Negotiation
MONEY - THE PRICED ROUND

25. MONEY - THE PRICED ROUND
 More Valuation Methods
 (Patents + People) x $1
Million
 Comparables
 Discounted Cash Flow
 Market Multipliers
 Discount to Public Companies

26. www.startuprounds.com
VC NEGOTIATIONS
 When to mention valuation
 Staged Investment
 Liquidation Preference
 Control
 Blocking rights
 Drags and tags
 Anti-Dilution protection

27. OTHER FINANCIERS
 Private Equity
 Crowdfunding
 Strategic Investors

28. CROWDFUNDING
$34.4 billion raised worldwide in 2015 – an increase of 212% from 2014
 Categories
 Business and Entrepreneurship ($6.7 billion)
 Social causes ($3.06 billion)
 Films and performing arts ($1.97)
 Real estate ($1.01 billion)
 Music and recording arts ($736 million)
 Split by type of crowdfunding
 Donations and rewards
 Lending-based crowdfunding dominates the industry ($11.08 billion)
 Equity-based crowdfunding
Source: Massolution Crowdfunding Industry Report

29. CROWDFUNDING

30. CROWDFUNDING
Source: Massolution Crowdfunding Industry Report

31. EXITS

32. ACQUISTION

33. INTERNATIONAL TAX
INTERNATIONAL TAX ISSUES FOR
CHINESE INVESTORS

34. US BRANCH VERSUS US INCORPORATION
• A “branch” is generally a fixed place of
business (i.e. an office or factory) in a
foreign jurisdiction in which a corporation
carries on its business. A branch is not a
separate legal entity.
• Will be taxed on ECI, or “business profits”
attributable to a permanent establishment,
if the treaty is claimed.
• Need US Tax ID and FEIN.
• Branch Profits Tax may apply; branch rules
compliance burdens.
• No liability shield.
34
• Incorporating means a new legal entity will
be established in the US.
• Such entity will be taxed like any other US
entity; i.e. on worldwide income.
• Need organizational documents; bylaws,
management, etc.
• Need US Tax ID and FEIN.
• No Branch Profits tax.
• Transfer Pricing compliance burden may
exist if US Sub engages in business with
Chinese parent company.
• Shields liability.
US Branch US IncorporationChinese
Entity
US Branch
Chinese
Entity
US Sub

35. EFFECTIVELY CONNECTED INCOME (ECI)
• Applies to foreign entities with a “US Trade or Business”
– If the Chinese Entity performs (or performs through the use of certain types
of agents) “considerable, continuous, and regular” economic activity in the
United States, depending on the facts, such performance will be considered
a “US Trade or Business” (or US T/B). Passive investments usually do not
rise to the level of a US T/B.
• US tax on income “effectively connected” to the US T/B
– The income, gain or loss is “Effectively Connected” when either (1) it is
derived from the assets used or held for use in the Chinese Entity’s US T/B
or (2) the activities of the US T/B were a “material factor” in the Chinese
Entity’s realization of such income, gain or loss.
• US - China Tax Treaty (“Treaty”) Effect
– If the Chinese Entity qualifies for Treaty benefits and claims its benefits, the
tax will be instead on the “business profits” attributable to its “permanent
establishment” in the US, if any exist.
35

36. BRANCH PROFITS TAX
• The Branch Profits Tax (BPT) operates to eliminate any tax preference a US branch may
have over an incorporated subsidiary by treating the branch as if its profits were earned
by a US subsidiary of the Chinese entity.
• The additional 30% tax applies, generally, to “after tax E&P that is effectively
connected” with the Chinese entity’s US T/B (“ECE&P”) to the extent such ECE&P is
either (1) not reinvested in a US T/B by the close of the taxable year or (2) disinvested in
a later taxable year.
• US-China Tax Treaty eliminates the BPT for corporations that are “qualified residents” in
China. A PRC resident enterprise is a qualified resident, unless (1) 50 percent or more
(by value) of its stock is owned by individuals who are not residents of China and who
are not United States citizens or resident aliens; or (2) 50 percent or more of its income
is used (directly or indirectly) to meet liabilities to persons who are not residents of
China or citizens or residents of the United States.
36
Chinese
Entity
US Branch
ECE&P taxed
at 30%
If ECE&P is
reinvested,
no tax

37. EARNINGS STRIPPING
• Operating group company structures, with an incorporated Chinese subsidiary in
the US, may attempt to shift income away from the US Sub by issuing loans from
the India parent to the US Sub requiring the payment of deductible interest back to
the India parent. This “earnings stripping” causes the US Sub to have an overall
decrease in profit (decrease in tax), shifting the additional profit to the India parent
(not subject to US tax).
• Section 163(j) of the US Tax Code is applicable if – (1) a domestic corporation’s
debt-to-equity ratio exceeds 1.5:1 (i.e. it is “thinly capitalized”) and (2) the domestic
corporation makes interest payments to a related person exempt from US taxation
(i.e. a foreign entity). Section 163(j) denies the domestic corporation’s deduction
for interest payments to the extent the total interest deduction would exceed 50%
of the corporation’s income (before deducting the interest).
37
Chinese
Entity
US Sub
Loan
Interest
Payments

38. WITHHOLDING TAXES
• Foreign recipients will be subject to US withholding tax on payments
of US-source income (as determined under US internal law) that are
either (1) fixed or determinable annual or periodical (“FDAP”)
income or (2) certain capital gains specified by Section 1441(b).
• Generally, the withholding regime taxes all US-source income that is
not already taxed in the “effectively connected” to a US T/B regime.
FDAP income encompasses all types of income, except those
specifically excluded by the regulations.
• FDAP examples are: interest (excluding “portfolio interest”),
dividends, rents and royalties.
• FDAP tax is generally 30% on the gross amount of the payment.
• Duty to withhold is on US payee, and such payee could be liable if
amounts are not properly withheld.
38

39. WITHHOLDING TAXES – TREATY EFFECT
• Dividend & Interest Relief
– The Treaty provides for a maximum allowable 10 percent tax on gross dividends and interest paid by a
resident company if the recipient is a resident of the other Contracting State and is the beneficial owner.
– The reduced withholding rate does not apply if the beneficial owner maintains a PE or fixed base in the
dividend/interest source country.
– A total exemption from tax by the source country applies to interest derived by the government of the
Treaty partner, its Central Bank, and any wholly-owned government financial institution in the
Contracting State.
• Royalties Relief
– For most royalties, the source basis taxation is limited to 10 percent of the gross amount.
– For rental income of industrial, commercial or scientific equipment [ICSE rental], an effective maximum
rate of 7 percent applies to the gross rental, in recognition of the costs associated with leasing capital
equipment.
– A royalty is considered to be sourced in a Contracting State if paid by the government or a resident in
that State.
– The reduced withholding rate does not apply if the beneficial owner maintains a PE or fixed base in the
other Contracting State.
• Service Income Relief
– An individual performing services in the US, (1) under Article 14, as an employee of an Chinese entity
may avoid US taxation if the individual is present in the US for less than 183 days and the compensation
is not borne by the Chinese entity’s “permanent establishment” in the US, and (2) under Article 13, as
an independent contractor may avoid US taxation if the individual renders professional services, without
a fixed base in the US, and without staying in the US for 183 days (or more) during the taxable year.
39

40. TRANSFER PRICING
• Under Code section 482, the IRS can re-allocate income among “controlled” entities,
such as a India parent and a US sub, to properly reflect income. The prices charged
between such related parties (“transfer prices”) are required to be arm’s length.
• Current regulations impose substantial penalties for understatements of US tax due to
transfer pricing adjustments – 20% or 40% of the underpaid tax, depending on the size
of the understatement. The US sub can avoid penalties, even if the IRS does not accept
its transfer prices, by completing a transfer pricing study (“TPS”) before the income tax
return has been filed. The TPS must meet the requirements of the regulations and
apply the best method for determining the US sub’s transfer prices.
• Most often, the TPS will utilize the comparable profits method for determining the
appropriate transfer price. Such method determines the “arm’s length price” by
referring to objective measures of profitability derived from uncontrolled taxpayers that
engage in similar business activities with other uncontrolled taxpayers under
comparable circumstances.
• Article 8 of the US-China Tax Treaty states that when there is sufficient indicia of
relatedness through participation in management, control or capital of the related
enterprises, then the taxing authority has the power to re-allocate income, deductions
and credits in accordance with an “arm’s length” standard.
40

41. The Innovation Network supports companies focused on
creating new technologies for the ag and food industries
Royse University: Providing business, tax, technology and
personal finance ideas to founders and executives.
Royse Law Presents: Supporting the Tech and legal
community through events, networking, and webinars
Royse Law Incorporator: Incorporate your company the
Silicon Valley way.
RoyseLawIncorporator.com
RoyseUniversity.com
RoyseAgTech.com
RoyseLawPresents.com

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