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In a rapidly evolving global startup world, questions about a company's location and structure need to be more carefully considered.

• Startup activity has gone global. There are now over 400 startup ecosystems around the world.
• Two of the most recurring questions for a new entrepreneur are where to form their company and what structure it should take.
• We explore several important considerations US companies should think about and offer some examples and recommendations.
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Startup activity has gone global. There are now over 400 startup ecosystems around the world.

Two of the most recurring questions for a new entrepreneur are where to form their company and what structure it should take. In the US, startup lawyers typically provide a simple answer: You should be a Delaware C-Corp, as this is the jurisdiction and form almost all US venture investors expect. But in a rapidly evolving global startup world, these questions need to be more carefully considered.

Below, we explore several important considerations - focused on US-centric entrepreneurs - and offer some examples and recommendations.

Scenario 1: You are building a local company in an international market, but it is primarily funded by US investors

In Alex's MBA class at the Middlebury Institute for International Studies at Monterey, many of the students are looking to found startups in a particular emerging market, but expect to have US investors. For example, this year, one student is launching a Colombian eco-hotel and ecotourism chain, and another, a fintech-enabled consumer lender for the Pacific Islands. The founders, the technology team, and the business will be housed entirely in their chosen local market, with little expectation of further expansion.

Despite the companies being localized elsewhere, many US investors will be uncomfortable investing in a foreign entity. Thus, it makes sense to create a US holding company for governance and investment purposes, which can oversee the local company. At the same time, an entrepreneur should consider what the implications of US control over a foreign business are for tax purposes, in both the US and the target country, as well as the laws in such country around direct foreign investment. In countries with a stable transparent judiciary and well-developed corporate legal system, it's possible US investors could get comfortable with direct investment, which should reduce complexity.

Scenario 2: You are building a global startup from the US

An increasing phenomenon is building a global startup from the US. In this case, it would be expected you start as a Delaware C-Corp. Most companies will focus on optimizing their corporate structure when it is clear they are gaining traction, typically around their Series B or Series C financing.

An example of an optimized corporate structure would be:

Your Delaware C-Corp forms a wholly-owned subsidiary in a low-tax jurisdiction (for example, Hong Kong, Cayman Islands) and transfers all or part of its intellectual property to the subsidiary. The Delaware C-Corp continues to operate and sell to customers as before, but now future profits begin to accumulate in the subsidiary, where they are subject to a lower tax rate. In addition, future acquirers will be more interested in acquiring your company (and pay a higher premium) because they can more efficiently move your company's intellectual property into their global structure.

Scenario 3: You are starting in one foreign market, but intend to grow to multiple countries, all primarily funded by US investors

In this scenario, you might be starting your model in any particular market, but consider it a testbed for future expansion. For instance, you and your technology team may be based in Peru. However, you want to rapidly expand across the Latin American region. What should you do now?

Your desire to build a global company is an important consideration. Although you will likely start with a Delaware C-Corp parent company to get your US investors comfortable, you'd ideally be thinking closely about how to structure the ex-US intellectual property ownership much as described in Scenario 2 above.

This noted, global ambition may not necessarily indicate global means. Optimized legal and tax structures require investment and can add non-trivial levels of cost and complexity - one might spend over $100,000 setting up a basic offshore entity and putting in place appropriate inter-company agreements, transfer pricing structures, and intellectual property optimization strategies. Depending on the size of the business and scope of its ambition, this level of complexity may not be required. It's wiser to focus initially on achieving success in one market, before optimizing your legal structure as you look to expand. But don't wait too long - the costs of optimizing your corporate structure will increase dramatically with the complexity and value of your business.

Scenario 4: You have global investors that do not want to invest in a US company

Sometimes foreign investors will not want to invest in a US company for fear of becoming entangled in US tax and regulatory issues. In this scenario, it is likely that investors will suggest a parent company that is based in a jurisdiction with well-developed corporate laws and little to no taxes, such as the Cayman Islands or Mauritius, depending on what part of the world you're operating in. These decisions should be considered as early as possible in a company's life cycle. The solutions will often be bespoke.

To sum it up …

In the early days, startups often opt to choose the simplest legal structure possibly to save on costs. However, for global businesses with operations in multiple jurisdictions, choosing the right structure is rarely simple. It requires deep reflection on the vision and strategy of the business. Choosing simplicity over reflection creates future complexity and likely undue costs as you correct over time. Hopefully the above primer offers some valuable rules of thumb to at least get you started in the right direction.

Best of luck!

Jonathan Axelrad is a corporate partner in DLA Piper's San Francisco office where he represents emerging growth technology companies from formation through exit, including advising them on equity and debt financings, corporate governance matters, mergers and acquisitions, and other complex strategic business transactions. He also represents venture capital funds and angel investors investing in early-stage companies. Prior to law school, Jonathan worked in Washington, DC at a national environmental group and the US Congress in then Congressman Jay Inslee's office and on the Energy & Commerce Committee. Jonathan also worked at the Securities and Exchange Commission and Overseas Private Investment Corporation while in law school. Jonathan graduated from Georgetown University Law Center cum laude and did his undergraduate studies in French and political science at University of Victoria, British Columbia and Universite Laval in Quebec City and speaks French and Japanese.

Alex Lazarow has worked at the intersection of investing, innovation, and economic development across the public, private, and social sectors for more than a decade. He is a venture capitalist with Cathay Innovation, a global investment firm, with over $3 billion in assets and offices across the world. He is also an adjunct professor with the Middlebury Institute for International Studies MBA program, where he teaches entrepreneurship. Previously, Alex worked with Omidyar Network, a global early-stage investing platform that has invested over a billion dollars in hundreds of startups. Alex has experience in strategy consulting with McKinsey & Co., financial regulation with the Bank of Canada, and M&A investment banking with the Royal Bank of Canada. He is a Kauffman Fellow, CFA Charterholder, and CFR Term Member. He earned an MBA from Harvard Business School and a B.Comm from the University of Manitoba.