Incorporation is the birthing of a new business. It is one of the first and key milestones, which signifies a company’s legal and operational commencement.
trica equity collaborated with Inventus Law and conducted an online panel discussion on ‘Incorporating in the US: What it takes?’ It was an interesting and insightful session.
Who are the Industry Experts?
The session saw two highly accomplished and experienced professionals sharing their knowledge and views.
The first speaker, Mr. Anil Advani, is the founder of Inventus Law, a firm that has helped Indian startups incorporate in the US for the past 21 years and manages almost all the Indian YC companies. The second speaker, Mr. Sanjay Jha, heads trica equity, which is India’s foremost ESOP and Cap Table management product with 300 customers including unicorns like Delhivery, Pharmeasy, Infra Market.
The Three Key Takeaways from the Discussion
From Mr. Advani’s words, the trend of Indian founders looking to flip their existing business structure to the US was clear. As of December 2020, more than 1000 Indian start-ups had flipped to the US in the preceding 5 years. Here are the key takeaways from the discussion.
1. Benefits for Indian startups if they incorporate in the US
Incorporation in the US is an expensive affair. But the advantages significantly outweigh the cost aspect. Here are the reasons why companies should consider incorporating in the US:
- The potential customer base for revenue generation greatly increases when there is an incorporated base. This is highly relevant, especially for tech startups whose products or services always have a market in the US.
- The avenues from which capital can be generated are more in number.
- The laws pertaining to incorporation are clear and transparent. This applies particularly to Delaware, where the rules and regulations are straightforward, and hence, many companies are incorporated here.
- The scope for recruiting talented employees with global exposure increases.
- The access to exit options is far greater when a company is incorporated in the US.
2. Incorporation Structure for US-India Startups
According to Mr. Advani, there are five options for legally structuring entities in India that wish to make an entry into the United States. These are:
Option 1: US Parent Structure
Option 2: Parallel Investment Structure
Option 3: India-based Parent Company
Option 4: Singapore-based Parent Company
Option 5: Cayman Parent Company
Of these options, Mr. Advani highly recommends the US Parent Structure (Option 1). In this structure, a holding company is created in the US, and its subsidiary operates in India. The holding company raises funds and transmits them to the subsidiary, which uses them for its operations in India. There are no changes in the operations or the fund flows. However, the legal structure comes with its accounting implications and nuances, such as transfer pricing, which need to be looked into.
3. The Most Important Dos and Don’ts of Incorporating in the US
Mr. Advani emphasizes the following two crucial points, which will improve the readiness of your startup to have a foothold in the US.
Don’t delay starting. Many companies shy away from incorporating in the US, citing that they are too young or too small. However, as they grow in size and scale, it becomes increasingly complex to incorporate in the US in terms of tax records, customers, operations, etc. Mr. Advani also advises incorporation in the US at the beginning since it is easier, cheaper, and more advantageous, as the accessibility to global resources is greater from the get-go. This is more so for tech companies. However, even if the startup in question is in the Indian e-commerce or B2C (consumer-oriented) space, the organization will have access to global capital.
Do have a plan in place. It is important to be very clear about the primary and secondary products and services of the business (principal revenue-generating activities), the target customers and their characteristics, the operating cycle, resources required along with costs associated, plans for generating capital, growth, and expansion of the business, and changes in the capital structure to support such growth. Having clarity on these aspects is a crucial step in order to decide the plan of action regarding incorporation in the US.
Equity Management Across Multiple Locations
Incorporation and initial generation of funds through equity are parts of the first steps of a company. To sustain and thrive, the entity must manage its equity effectively. This is more important if there is a presence in multiple locations. Mr. Sanjay Jha discussed two key aspects of equity management which are discussed below:
1. Employee Stock Option Plans (ESOPs)
ESOPs give employees the right to buy the company’s stocks at a certain price after a fixed period. They are advantageous because of the following reasons:
- They are a powerful tool to incentivize, reward and retain top employees.
- They create wealth for employees.
- They help in building the core team and also conserving cash in the early stages of a business.
Mr. Jha’s four-step rollout plan for ESOPs:
- Getting the stock option plan prepared by a lawyer, including all details such as ESOP administration, employee cessation, vesting, grant, and exercise periods.
- Getting the stock option plan approved by the board and the shareholders.
- Rolling out grant letters for which 409A valuation certificates as on the grant date are mandatory (unless the company has employees only in India).
- Annual compliance, including the maintenance of accounts and disclosing the related expenses in the Income Statement
Click here to learn more about rolling out ESOPs.
2. Cap Table Management
A cap table is a snapshot of the equity structure of a company. It is a must-have for all startups and must be studied and updated frequently as the company evolves. Cap table management involves analysis and presentation of the following:
- Shareholding records
- Share certificates
- Documentation for funding rounds
- Common stock
- Preference shares
- Convertible securities
Cap table management ensures that its users, particularly the founders and decision-makers, can easily assess the need for further funding. Click here for more information on cap table management.
The panel discussion with Mr. Advani and Mr. Jha, experienced startup incorporation and equity management experts, was highly enriching. It shed light on the most crucial aspects of both topics in a crisp manner. Watch the full interactive webinar on YouTube.
To know more about ESOPs, click here.
The Expertise of the Panelists
Mr. Anil Advani is a startup lawyer and the Founder and Managing Partner of Inventus Law. He has 21 years of experience and specializes in structuring US-India operations for startups. Inventus provides legal support for most of the start-ups associated with Indian start-up accelerators like Y Combinator, Morpheus, 500 Startups, Tandem Capital, Alchemist, and K-12 to name a few.
Mr. Sanjay Jha is a techie, leader, and founder of LetsVenture, a fundraising platform for startups, and trica equity, a Cap Table and ESOP management company. He is an alumnus of IIT Bombay and IIM Bangalore and has over 25 years of experience in software development.
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