TABS Podcast

Welcome to The US expansion series. The podcast where you can learn about successfully expanding to and scaling your business in The US markets. My name is Fleur.

My name is Flora. And in every episode, we dive into a different aspect of a successful market expansion.

Flora, how are you today?

I'm doing well. Thanks. Happy to be here.

For this episode, you spoke to London based lawyer Daniel Glaser, and you two discussed how a European company should set up and scale in The US. How did your conversation go?

It was a great conversation. He has so much experience assisting companies with their US expansion. And we've been working with him for over two years now, and it's been a great pleasure to collaborate with him. Over this episode, he shares a lot of information from how to set up a local entity, using agents to get the first boots on the ground in The US, and eventually raising funds from US investors.

Wow. That's a lot of valuable information. I guess, be prepared to take notes for the listeners. Well, without further ado, let's dive in.

Ben, thanks so much for joining our podcast today. We're so excited to do this podcast with you, especially since you have so much experience assisting European companies that expand to The US. But before we dive into all of this, could you please introduce yourself and tell us a bit more about what you do?

Sure. Sure thing. Thanks a lot for having me today. So my name is Dan Glaser. I'm the London office managing partner at the Silicon Valley headquartered law firm, Wilson Sunsini.

Little bit about Wilson. So we were the first law firm in Silicon Valley to work with tech companies back in the early nineteen sixties when the first venture funds were formed to invest in tech companies. And our model is sort of to work with garage stage startups as it were and scale with them up to IPO and then beyond as a public company. Probably our our best known example is that we worked to incorporate Google as a company for Larry and Sergei back in the in the late nineteen nineties. We then worked with them when they went public in 2004, and and we we still work with them today.

So currently, we're we're about 1,100 lawyers, Silicon Valley headquartered with 13 offices around The United States. All we do is focus on working with technology and life sciences companies. So I head up our London office and our US expansion team. And our London office is a team of about 30 US and and dual qualified UK, US corporate tech lawyers that work with European startups through their US life cycle, launch scale, raise venture capital, and then exit through m and a or IPO in The United States. Everything from, let's say, accelerator stage team that goes to San Francisco to raise a seed round all the way up to companies that think about listing on the New York Stock Exchange or the Nasdaq.

But the most common point we start to engage and what I'm sure we'll talk more about today is when a company comes to us with one of two questions. We're looking to launch in The US. What do we do next? Or we are looking to raise money in The US. What do we do next?

Because we receive the question often like, of course, for most European startups, The US is a very attractive market with a lot of potential. And there we have a lot of conversations with companies that are interested in The US, and they often ask us when is it the right time to expand to The US? When is our company ready for it? So, yeah, do you have any general advice for companies that are interested in The US?

Sure. I mean, we we we find that the companies that were the most successful coming out of Europe going to The United States are the ones that go early or the ones that go late. And and here's here's what I mean by that. Going early is when let let let's say, you've got a founding team in in Europe and they look at The US market and they say, you know what? That's really going to be our our our big market.

That's the market that we're going to decide that we're going to design our product offering for in the first place. And so they will often move management, let's say, the, you know, the founding team to The United States and let and keep engineering and development other back office functions back in Europe, but they will build build out the company specifically to tackle the The US market from fairly early in in the company's life cycle. They then will raise money from US investors as if they were a homegrown US startup because in some ways, they are a homegrown US startup. Now and and they will scale as a US led European business. Right?

That's that's what I mean by by by go early. Now that was, I think, a lot more common, let's say, seven, ten years ago when there wasn't as robust of a venture capital ecosystem in Europe. And we we still do do do see some companies follow that that that model, but it used to be, let's say, more prevalent be be because you saw founding teams come out of Europe, let's say, unable to raise early stage capital. That is a lot that's a lot less likely now. And and so going late is is we we we see as the much more more common model.

And by go late is is I mean, the following. Company starts in in Europe and initially designs its product offering for it it its home market and then raises, let's say, a seed round and maybe even an a round from local or maybe pan European venture capital investors. And then eventually, it gets pulled into The US by customer traction or user growth. Right? Like, it's a b to b SaaS business that, you know, starts to get more and more U U US customers and more and more portion of its ARR greater portion of its ARR is coming out of The United States.

It's a b to c company that that starts to see significant user up up uptake customer update to up uptake from The United States. And, eventually, they look at The US market and say, there's real product market fit there, or we are close to product market fit there. So what they'll typically do is either, let's say, hire part time contractors at first, but then eventually, hire in in in employees and maybe even send some people over from eight HQ to help scale up the the the business in in The States, knowing that that that that that they've got product market fit or close to it. In other words, they've derisked market entry by that initial customer traction and user growth selling in remotely from from Europe. And then they they they'll they'll build from there as a transatlantic business and maybe raise their next round from from US based investors.

It's that going in the middle that ends up being a little bit tricky. Right? That and but it's it's tempting. Right? I mean, The US is a massive commercial market.

It has plentiful venture capital. It seems like everybody's willing to buy tech there. And and and so, you know, sometimes we'll see companies that get started in Europe, but before they've built a strong enough foundation in Europe, before they've built sufficient product market fit, then they they try to also go at The US simultaneously. And trying to to build on both sides of The Atlantic at the same time without having product market fit in both is very, very difficult. Right?

It's it's it's

because then it's difficult to focus if you go in the middle?

It's well, first thing, it's it's expensive. Right? Be be because what and it's expensive in terms of money. It's expensive in terms of time. Right?

You're you're still trying to to to build a foundation in your home market. Yet now you're you're, let's say, hiring people in The US who generally have higher salaries than than in Europe, you're sort of taking your eye off the ball to some extent from your home market while devoting time and energy and money to The United States, which is a very demanding market to get right. And that's fine if you if you've built a foundation in Europe, you've got people in Europe who can mind the store as it were while, you know, others focus on The US. But if you've if you haven't built that found foundation and found that product market fit in Europe and at at the same time, you're going into what's arguably the most competitive market in the world, that's hard.

Yeah. And then if you're in that early phase, you're interested in a market, you wanna see if you have product market fit there, if you have traction there, you're first going to sell remotely. But I can imagine that it's then an a great way to work with agents so that you sell that boots on the grounds, without having to set up a real presence or subsidiary there. We'll talk about that later, but that, of course, has, yeah, a whole different level of requirements. But how easy is it for European companies to work with US agents?

Are there any legal risks there?

Yeah. I mean, it it's it's a very common middle middle ground. Let let's say middle step, be between only selling in remotely from a purely European based business with no one on the ground in The US. That's on the one hand. And then the on the other hand is setting up a proper US subsidiary, hiring employees out of that subsidiary and having, you know, a a proper US business.

In between, and again, this is a very common intermediate step, is to hire contractors, sale sales agents, consultants, but ultimately, you know, nonemployee contractors who, in a matter of speaking, can fly the flag for your European business, you know, with with sort of a light touch structure. In other words, you can generally hire those individuals out of a European parent company without creating a US subsidiary. Right? So it's it's sort of a structure light approach to to going to market in The US. You have individuals who are sort of your people on the ground in The United States, but without the the sort of the the sort of corporate structure, the the benefits packages, you know, all all the rest of that would be associated with with setting up a a proper, you know, employment structure with a subsidiary in The US.

You know, that's a great model. And and it's and as I said, it it it's a very common intermediate step. I would say the the the biggest risk in The United States to to to doing this is is sort of what I what I I I sort of have the following analogy. Right? If it if it looks like a duck and it quacks like a duck, it's a duck in The United States even if you contractually stipulate that it's a goose.

Right? Here's what I mean by that, is that just because you have a a signed written contract with someone saying that they are a contractor does not mean that they will be deemed to be a contractor under the laws of the relevant state. Right? Because whether someone is an employee or or not in The US is not dictated, not determined by whether or not they have a formal employment contract in in place. Right?

Like, for for example, if you called me up tomorrow when I was sitting in in in The US and you said I want you to work for me, and I said, sure. And then I started working for you the next day, I'm gonna be deemed to be an employee. Yeah. Yep. Right?

And and so what I mean by, like, it looks like a duck and a quacks like a duck, it's a duck, is that if you bring someone in as a and you have a a this nice written contract saying that they're a contractor, but, you know, they're your, you know, VP of sales North America, and they work forty to fifty hours a week, you know, and and everything else about them looks like an employee, but they have this nice contractor agreement, the chances are that they're probably going to be deemed to be an employee. Right? And but this is it's interesting because this is a state by state issue. Remember, The United States, the reason they call it The United States, is that it's 50 different states. It says it on the Tin, United States.

You know? And it's it's yes. It's a single country, but it also has, you know, 50 different legal and tax systems. And for example, you know, while it may be relatively straightforward to hire contractors in New York, in California, you know, it it's much more likely that your contractors are going to be deemed to be, in fact, employees. So not only do you have to be careful about this point in general when hiring contractors, but you really need to be careful about it specifically, you know, on a state by state basis, you know, what are the rules.

Now, you know, we we certainly work with enough high growth startups to to know that yeah. It you know, it's easy to say, yes. This is a risk, and that's a risk, and you shouldn't do this. You shouldn't do that. Yeah.

I you know, certainly, when when you are building a high growth, you know, fast moving company, sometimes you have to cut corners. You know, not that you you should, but it's understandable. Right? This is not, however, a a corner that that that is a good one to cut. Right?

Because what can happen is is that eventually, when you end up, let's say, terminating that relationship as the company, you know, with your contractor on the ground into in in The US, if you're not careful, that can turn into a dispute where the individual, you know, claims that they were actually an an an employee, not a contractor. Right? And then, you know, and and then make certain threats as a as a terminated employee against the company, and that and that's gonna have to be handled. So the the the best approach is to just avoid this issue in the first place and may may make sure that if you're hiring contractors, they're properly contractors. And if it's in instead, if they're really intended to be employees, well, setting up a structure, subsidiary, and everything that goes around it is not that difficult.

And once you're ready to have a physical presence, what are the legal considerations for setting up in The US?

Sure. Over time, that really has been developed sort of best practice for that that point in the European company's life cycle where it says, right. I'm gonna hire my first US employee. What do we do next? Right?

So I I'll give you the sort of, you know, standard operating model of what that that that typically looks like. So more often than than than not, the company is going to to the the European parent company is going to set up a a a Delaware incorporated wholly owned subsidiary of the European parent company. And let me let me break that down. So why Delaware? As a headline, Delaware reduces friction.

I I can go deeper than that, but that really is the headline. Right? Delaware reduces friction. Long ago, Delaware established itself as the as the sort of state of choice for incorporation in The United States. It has a very clear set of corporate governance rules.

It's it's it's relatively inexpensive. It's certainly efficient to to set up in in in Delaware. It actually doesn't really have anything to do with with with with tax, is which sort of a common, I think, misnomer, you know, out out outside of The US. No. And it's not really tax at all.

It just it it it has very predictable, very, very good corporate governance laws, and it just it reduces friction when when you're going to market in in The United States. In fact, when when you know, we can talk about this later. And if you're thinking about creating a parent company in The United States or incorporating in The United States, let's say, without a European parent company, you know, keep in mind that the entire venture capital ecosystem in The United States is built on a foundation of investing into Delaware corporations. It doesn't mean that US investors won't invest in something other than a Delaware corporation. It it's just that the earlier stage you are, the more that they will prefer to invest in the Delaware corporation.

But that's sort of a different point. Right? If you're if you're if you're going to market as a European parent company simply hiring in in The US, you're pretty much every time gonna wanna think about incorporating in in in Delaware. And it's always gonna be a subsidiary generally, you know, unless you are sort of currently raising money from from US investors and they insist on investing into a a US parent company. The the easiest way to think of it is is is this.

The the decision to create a a Delaware subsidiary is a commercial and operational decision. The decision to create a Delaware parent company is solely an investor driven decision. In other words, unless US investor demands or requirements end up playing playing into the consideration, If you're going to market in The US and you already have a European parent company, to the extent that you need a a US company to do whatever it is that you wanna do, that can that can typically be accomplished through a a Delaware subsidiary. Now the one thing that I've been staying away from because I just want I want I I wanted to talk about a little more detail is what form of entity should that subsidiary take. Right?

And the the the two most common choices are a Delaware corporation, otherwise known as an Inc, or a Delaware limited liability company, commonly referred to as an LLC. And I'll tell you the now that one, the answer really is determined by by by tax. Although it actually tends to be the the the tax rules of the whole market of the the of of the parent company's home market tax rules. So you could say the the the the big difference here between a corporation and an LLC for for purposes of creating a subsidiary of a of a European parent company is that a a corporation is a taxable entity. In other words, the corporation is itself taxed for its activities, whereas an LLC by default is a tax pass through entity.

And depending on the the the home market tax rules of the parent company, right, a corporation, the taxable entity, or the LLC, a tax pass through entity, may be may be preferable. And you just need to determine which is preferable under the the the the tax rules of the local jurisdiction. I will tell you, broadly speaking, most of the time, the feedback that we get from tax advisers in European in the different European countries tends to be corporation rather than LLC. However, some sometimes it is LLC. So I I know, that's one that that that we usually recommend to companies that they just confirm with their home market tax advisers that corporation is the right answer before we we go ahead and do that.

Because from a legal standpoint, either one's fine. This truly is a a a tax point. Right? So alright. So now we have a let but let let's assume for the sake of this discussion, we have a Delaware corporation subsidiary.

What do do next? Alright. So you've got your Delaware corporation subsidiary. Yeah. And let's say for the sake of argument that you're gonna hire your first employees in the state of New York.

Yeah.

Right? Okay. So you're going to then register to do business as a foreign Delaware corporation operating in the state of New York, right, with the secretary of state's office of of of New York. Yeah. And you are going to give your New York employees two employment documents.

Right? A New York state specific IP assignment and confidentiality agreement, which does what it says on the tin, as they say. Right? And a New York State specific offer letter, which has the economics and the financials of the arrangement. And every time that you go to a new state, you're going to engage in those same activities over again.

So let's say that your next state is California. You're gonna then when you hire in California, you're going to register your Delaware corporation as an entity doing business in California, and you are going to provide the employees in California with California state specific employment documents. Very important. Do not simply cross out New York and write California in your employment documents. Because, again, I I go back to what I said a few minutes ago, each state has its own unique employment rules.

So now you've you've you've you've set up in in, let's say, in New York with your first employees there, and let's say that you wanna provide options to them. Right? You wanna provide up and so a a couple things about that. Right? First of all, it is generally always going to come out of the parent company.

Right? Not out of the sub because the value of the enterprise is in the parent company. Right? And if if you're an employee in The United States, you you are going to want the equity in where the value of the company lies, which is in the parent. In in the sub, the depending how things were were were worked out with the sub, you may end up trying to take money out of the sub and and put it into the parent.

And, you know, if you're getting equity in that in that entity, that might not be a great outcome as a, you know, as an employee. Most importantly, when you're providing options to US employees and this the specific structure of how you do this is going to differ depending on what what what your home market entity is. Right? Whether it's a, you know, a German GmbH or a UK Limited, etcetera. But but what will generally always be be true is that you're going to need to get a specific US internal revenue service compliant valuation, right, in order in order to do that.

That and you should not assume that your home market valuation in Europe is is going to meet the test and the standards for the US internal revenue service for the tax authorities. So you're going to get what's called a four zero nine a valuation. Right? And that's going to be tied to the fair market value of of the enterprise, and that will allow you to provide potentially tax advantaged equity or options to US employees and and and stay away from potential tax penalties down the road.

And do you see if you wanna be able to find and attract great talent in The US, it's necessary to offer options?

Yeah. Generally speaking, yes, in the respect that American start employ American employees of startups are typically compared to to to European employees, a little bit more focused on the potential upside associated with with with options. I think part of that stems from from from the fact that, you know, The US venture backed tech ecosystem has been going since the since the nineteen sixties, and there have been many, many, many examples of of employees of start ups that have ended up having significant outcomes from sizable m and a or I IPO exits. And and it's part of the of the motivation of many American employees in in joining a start up is that potential upside. So American employees on average, you know, will tend to be a little bit more focused on what does my option package look like?

Who are who are the company's VCs? Right? And are they VC investors who are likely to who have a track record of helping take their portfolio companies to to big exits? Right? Like, in other words, you're you're think think of American employees, at least many American employees in this regard, as looking at your business almost in the same way that a VC will look at your business because they are, in some respects, acting, you know, in a manner that is analogous to your to a potential VC.

Right? They are betting with their time, their time being their time spent being employed by by by the company, and they're doing it in part much like your VC is investing their money in part for the big exit. Yeah. Right? So so, you know, you you do wanna in America, in a way that you might not see it as much in Europe, you know, you are gonna wanna present yourself in a manner that that that shows a potential big big big outcome to the to your employees.

Yeah. To sort of cover off on on the legal side of setup, I mean, those are the three main areas. Right? Incorporation of the subsidiary, employment documents, and then and then options, you know, employee equity. There's a few other areas to think about when when you go to The US.

There's, you know, extending your patents and trademarks from your home market to The United States to the extent that that's relevant. There's Americanizing your terms and conditions or other contracts for the American market. And then finally, there's data data privacy. Right? The US doesn't you know, isn't bound by GDPR.

It has its own data data privacy rules, and you're you're if applicable, you're gonna wanna make sure that you comply with those as well. So it'll be tax accounting, banking, business insurance, and and and h payroll and benefits. And, you know, it's very common in in in The United States to to work with, let's say, what let's call it professional employer organization or PEO once you have the subsidiary. And a PEO co employees employees together with the sub subsidiary, which allows the subsidiary to leverage the PEO's retirement benefits plan, health insurance plan, and payroll system so as to leverage the economies of scale and get a better deal on that rather than go to market with a small handful of of employees and allows them to sort of, you know, outsource it so as to not reinvent the wheel. And from a cost standpoint, by far, the the the greatest cost is people.

Yeah. Salaries in The US tend to be higher, especially in the larger cities in America. They tend to be much higher than the equivalent salaries in Europe, and payroll and and benefits tends to be materially higher than in, in The in in Europe because we we have typically employer provided health care in in in United States as as standard.

Yeah. We also when we have conversations with new companies that are thinking of The US market, we have to prepare them already a little bit for the salaries, the health care, and the costs associated with it. It's always a bit of a scare.

But, you know, that's, that's why we often say, I mean, the the The US is is is sort of an ROI play. Right? It's a return on investment play that you and and it's it's why it's so important to to make sure that you're being, as I mentioned before, pulled into The US by customer traction and user growth.

Yeah. And that you're really ready to go to The US markets that you can do the investment. Yeah.

That that if, you know, if you're gonna go after The US, it will generally be more expensive than your home market if you're a European based company. However, the upside is potentially massive if you get it right. Yeah. Right? And and, you know, we we certainly talk to plenty of European companies that are, I think, a little bit concerned about the price, and, you know, they they should definitely be thoughtful about the cost of going to The US.

But, you know, if if you can make you know, if if your head of sales in New York who might cost a couple $100,000 or or or more is gonna make you several million of more or more, maybe that investment makes sense. Right? But you but but you don't necessarily want to invest in that in individual unless you've got some confidence. Yeah. You've got sufficient product market fit that that individual is is going to be able to sell successfully.

Yeah. Yeah. Exactly. And you already said a little bit about US VCs and the Delaware flip. So if you have the subsidiary, and you wanna raise funds in The US, can you tell us a little bit more about what US investors typically look for in European companies?

Sure. You know, and I think it it it really kinda depends on the stage of of of of the business. I mean and and as a as a rule of thumb, what I'll what I'll I always highlight is, you know, seed tends to be local. Series a tends to be national or perhaps regional if you're in Europe, and b and beyond is global. And, you know, I always say don't get too caught up in in the specific, you know, names of of the rounds.

It it's rather a seed it's rather more of a profile. Right? A a a seed profile round, right, whether it's technically an a or technically a seed or a pre seed or whatever, tends to end up being more often than than not local. A series a profile round, again, whether it's called a seed or a b or an a, tends to be more national or regional, and a and a profile of a b and beyond company tend tends to be global. And and what that leads to is that more often than not, for a your for an early stage European company to raise around from US based VCs, you typically need to have a pretty strong US story.

Now let me break down what what I what I mean by that. So, you know, we're sort of we're we're we're talking about the same terms. Right? When we when we talk about you when I talk about USVCs here, what I mean are US based VC funds that are investing out of The United States and do not have individuals on the ground in Europe. Right?

So for example, you know, I'm I'm based in in London. There are, I think, roughly three dozen or so funds that are US based funds that have that have set up in in London or outside of London over the past few few years. You know, they are there in part to make it easier for those funds to invest in earlier stage European companies. Right? So when I talk about, you know, what the profile of the company needs to be to raise from USBCs, I don't mean those funds.

Yeah. Because those funds are local, essentially, and are able to invest almost in a stage agnostic way to the extent that they are that they have a stage agnostic investment thesis. Right? That that that that that they can they can invest regardless of of geography in Europe as the same way they do if they were sort of homegrown European funds. What I mean is is that if you've got US based funds without any without anyone on the ground in Europe, and you've got European, let's say, seed seed stage or even series a stage businesses that have nobody on the ground in in in The US, well, then it gets a little bit tricky.

I mean, that you really do need to have a strong US story, and we we usually break that down into four there there's usually four types of European companies at Cedar Series A that end up getting funded by US based VCs as a lead investor, participating with a let's say, US VC participating in a round with a with a European lead is a little bit easier because they don't have to take the board seat. They don't have to take the you know, have to set the terms. They can rely on on on the local European based lead investor to drive the deal. But if you're talking about bringing in a US VC to lead the deal at Cedar Series a into a European company, usually, what there's one of four dynamics at play. Right?

The first is, let's say that they have management on the on on the ground in in in The US. Right? Okay. There's no sort of bright line as to what that means. Like, sure.

If you've got the CEO on the ground in The US, that's probably the the the clearest one. But, like, you know, head of sales, is that good enough? Well, it really kinda comes down to this. Can the The US v v VC or the or the fund, you know, is that individual senior enough so that working the VC fund working with that individual can really kinda move the needle as it were to to help build the the the the The US business. Right?

The the the the second is going to be what is the company's traction in The United States. Right? In other words, let's say it's a b to b SaaS company that that's got 3,000,000 in ARR. Right? A company that in that 3,000,000 in ARR that's got 2.5 of it coming from US customers.

Right, and with a 150 year on year growth is gonna look very different to a US VC than a European company that's got 3,000,000 ARR with maybe, you know, 50,000 of it coming from The United States with 40% year on year growth. Right? Again, it goes to how strong The US story is. Yep. The third might might I I would say the third dynamic that might lead to US investment is, you know, does the does the man what experience does the management team have building a US business or raising from US investors previously?

I mean, we've certainly seen highly experienced European founders who have raised from US investors in their prior business be able to attract relatively early stage US funding, because, frankly, they they they they present themselves as being a good bet, right, to to US investors who have seen those individuals succeed before. Right? And especially at the early stage of investment, a lot of it really is is about the quality of of the team, not not necessarily so much the metrics. Right? And then and then the fourth dynamic is simply, have you truly built the better mousetrap?

Right? In other words, is is your start has is your start up truly, you know, spinning straw into gold? And and and what I mean by that is that, look, if there really isn't any US angle at all, certainly, every once in a while, we we we we see a start up come out of Europe even at the early stage that that is is truly doing something completely revolutionary, 10 x better than any US company is doing. You know what? That's pretty interesting as as well.

But but I would say the vast majority of the time when you see a US based VC lead a Cedar series a round into a European company, one of those four dynamics is typically at at

at Yeah. Yeah. Yeah. Yeah. So, yeah, we're running out of time almost.

I feel like we could go on for hours. I have one last question. I'm personally always very fascinated by culture, and you are, of course, an American who's living in London. You're working with European, UK, US startups. Are there any common cultural differences that you notice when Europeans are doing business in The US?

So I I think what what I'll what I'll highlight is one of the the unique aspects of of of the The United States. Right? And and and that and then I think that is the the sort of the size and and and the scale of of kind of everything, but especially of potential outcomes in, you know, in in in in a venture backed techie ecosystem. So I'll I'll give you an an anecdote that sort of illustrates what what I mean by that. So a number of years ago, I was with a with with with a group of European companies in in the Bay Area, and there there there was a fund in in the Bay Area that that that that gave a talk about Silicon Valley venture economics.

You know? And and and and the VC said something along the lines of the following. He said, listen. You know, we like pretty much every fund in Silicon Valley is is looking to invest in companies that can return the fund or more. Not that we'll return the fund or more.

Obviously, we we we can't expect them to, you know, guarantee that for us, but at least have a credible pathway to return the funder more if everything breaks right. Right? And if there is no possible credible pathway for the company to return the funder more, then the opportunity cost of investing into the company is is too great. Even though there might be a relatively high likelihood of a smaller outcome, be be because we are looking as a Silicon Valley fund for fund returning opportunities, Right? We need to see that that credible pathway to returning the fund.

And he said, think about how that actually plays out in practice. You know, the the VC said, so we we take typically 10% when we invest, and and we have roughly, you know, a $300,000,000 fund. He said that means that we needed to we need to invest in companies that have a credible pathway to to to showing a $3,000,000,000 exit. Right? Yeah.

And I remember the group of European companies I was with, there was like an audible gasp in in in in the room. Right? But that's that's, you know, what the way that, you know, a lot of certainly traditional Silicon Valley style American investors are are are viewing the world. Right? Is is that they are willing to to to to to to bet on the massive potential upside even though the the risk of, let's say, loo losing you know, the the company zeroing out may may be high as well.

And I and I don't think you historically, you haven't seen quite that same high risk, high reward dynamic in in Europe for better or for worse. To be clear, I'm not saying that one is better than than than than the other. But I I do think that that some European companies that we speak with are surprised that, you know, a lot of Silicon Valley and Silicon Valley style US investors will readily pass on what seems to be a relatively certain but but smaller outcome for the possibility Yeah. Of the massive outcome.

Okay. Well, thanks so much, Dan. This was very helpful. Helpful. I think it will be very helpful for a lot of companies that are interested in The US.

That

was your conversation with Dan. Go early or go late. That is the question.

Exactly. And Dan described so well that the biggest chance for success is when a company gets pulled into The US by customer demand. And we've seen many companies over the years that didn't have the time and resources yet to fully focus on The US market. So I guess in Dan's category, these companies would indeed fall into the middle. That's very interesting.

Also,

the ESOPS, which we should dedicate a separate episode to. But especially for SaaS and tech companies, it's important to offer options when you want to attract great talent. And I didn't realize that employees in startups in The US are even more focused on having a stake in the company. But I guess it makes a lot of sense.

So if you're a European company looking to either launch and scale in The US or raise funds in The US, you should reach out to Daniel Glaser at Wilson Sansini.

Well, thank you Flora. And thanks to all the listeners. Please subscribe, like and share. You can find The US Expansion series on Apple Podcasts, Spotify or wherever you get your podcasts.

Welcome to The US expansion series. The podcast where you can learn about successfully expanding to and scaling your business in The US markets. My name is Flor. My name is Flora. And in every episode,

we dive into a different aspect of successful market expansion.

Flora, we had the pleasure of talking to Manny Schoenhuber and pick his brain on liabilities. And thinking back on our conversation with Manny, it almost seems like with being successful in The US comes the risk of liability and being sued. Although, to be honest, it doesn't sound very appealing or encouraging.

Yeah. It's a great way to start our podcast. I know, but I see what you're saying, and the risk is, of course, always there. But I also think companies shouldn't get discouraged because with liabilities, it's very important to take the time to prepare and think about how you're doing business, what could be potential liabilities in your business model, where are possible risks, and then think about how you can protect yourself. But if you're doing it properly, you can definitely limit the risk of exposure.

Absolutely. And that's why I think this conversation with many is actually very helpful for companies that are about to do business in The US. And I mean, it's a very specific subject, but nonetheless very important and I think necessary when you're on your US expansion journey. So let's dive in. Annie, thank you for joining us today.

We're very excited to have you on the podcast. And today, we'll be scratching the surface of the seemingly intimidating world of liabilities. But before we dive in, please introduce yourself and tell us a little bit more about what you do.

Thanks Flor. Thanks Flor for having me. I'm super excited to be here. This will be I'm sure a great episode. Thanks for the invite.

A little bit about myself, Manny Schoenhuber. I'm, from originally from a small town near Munich. Came to The States about ten years ago now. And I'm a practicing attorney at Jackson Walker which is the largest law firm in the state of Texas doing pretty much everything that a European company coming to The US or expanding into The US market would need on the legal side. And I personally exclusively work with European, Central European companies and help them with their legal needs.

Thanks, Manny. And we're so excited to be able to talk about liabilities with you today. I'm pretty sure that there's no topic that gets mentioned more often than this topic that we're discussing today. Like, when we have calls with clients or when we are organizing webinars, the number one question from founders is: how can I protect myself or my company against liabilities and getting sued in The US? So I think we should just like start right away with the most pressing question.

Is The US really a more litigious society? And how afraid should a company be of getting sued in The US?

I guess there's two parts to the answer. The first is definitely true. The US is the country with the most lawsuits all over the world, globally, statistically speaking, at least. But then as we do it with other statistics, we look at it per capita. So the percentage there is actually that The US only comes in on number five.

And to everyone's surprise, probably Germany is the country with the most lawsuits, legal disputes per capita in the world. So two parts. Yes, there's a whole lot of lawsuits in The US, which is also why there's so many lawyers. But on the other hand, the fear of potential litigation should not make a European company shy away from a huge market. You also have to put it into perspective that The US is a country of 300 more than 350,000,000 people.

And you compare that to The Netherlands, to Germany, Austria or Europe as a whole, of course chances are that if you're successful and somebody sees that the company is making money, that you will get sued, yes. But there's and I'm sure we'll talk a little more about it, there's ways to prevent that. But it should not be an excuse or deterrent for Europeans to come to The US if they read in the media in Europe another $100,000,000, jury charge verdict, against an entity. I mean, the big example is you talk Bayer, Monsanto, Volkswagen. Yes.

Very unlikely that this will happen to a European company coming here doing it the right way.

So going off what Flora was saying, how can a European company limit the risks of getting sued in The US when doing business with a US subsidiary?

So I always describe it this way that there's really three main pillars to the so called limiting liability pyramid. The first one really is to set up the entity properly. And most importantly for The US business you should set up a US entity. I see a lot of European companies just using the European entity and then selling into The US market. That may make sense on a tax side, as a lawyer, a former litigator or still a litigator, to a certain extent at least.

I always cringe a little bit when I see that because you put the entire company in Europe, all its assets, all its riches hopefully on the line in The US and everything is collectible in a US court if you're doing business with the European entity in The US. So the first pillar really is set up your entity the right way. Whether that is just a simple corporation or a limited partnership, an LLC, do something that's local to The US. Don't please, please, please don't do business with your Dutch entity and sell into The US. The second pillar on the pyramid, so to speak, is your contracts.

You gotta have your contracts the right way. You can limit your potential exposure liability in writing, in your contracts, in your terms and conditions. Europeans have to understand that The US is a different legal system. It's more akin to the British common law. It is based on British common law.

And countries like The Netherlands or other Central European countries, they're based on the French Court Civil. So you have statutes for pretty much everything. We don't do that here. Yes, there's a statute, the Uniform Commercial Code, which governs the sale of goods in The US. But we as lawyers, as companies work with contracts.

We work with our terms and conditions. And what generally speaking, whatever you put in your terms and conditions, unless a judge says, no, you can't do that, this is what governs the transaction. So we can limit liability, we can work with disclaimers, We can work with a lot of things in writing to limit exposure and your liability. Legally, limit that liability. And the last topic, the last third pillar is insurance.

You will want to have insurance for your US entity. I know that a lot of European insurance carriers also offer to cover you and your company, your business, for The US market. Yes. I understand that. And yes, it's a whole lot cheaper to do it that way.

But if things go really bad and sometimes it will, sometimes it won't, you will only need it when you need it and then it may be too late. The European insurance carriers will find an exclusion on your policy. So once you have your US legal entity set up, your corporation, get a local US insurance to cover that. So in short Mhmm. The three pillars, the last one insurance, the second one, get your contracts right, your terms and conditions.

And to start it all off with is get your US entity.

Can you explain briefly what the main insurances are that you would recommend?

Absolutely. So every company should have commercial general liability insurance, which we abbreviate as CGL with certain limits. Usually it's around 1,000,000 per occurrence and 2,000,000 in the aggregate. That's pretty standard unless you're in a high exposure field or for example you're working on construction projects, something like that where there may be more exposure. But commercial general liability is where it all starts off.

Once you have employees, workers' comp, car insurance, obviously when you have company vehicles. And then very important is also excess liability insurance, which we describe as umbrella insurance. And it really works like an umbrella. If for example you have a $1,000,000 policy on your CGL, but a great lawyer sues your company and gets a judgment for $3,000,000, you don't wanna be on the hook for the remaining $2,000,000. That's where the umbrella insurance hopefully kicks in and covers anything in excess of what you already have.

And then there's when we're looking at the individual level, DNO directors and officers insurance which is not as important as it would be in Europe because piercing the corporate veil which means getting to the personal liability for a manager or an officer is a whole lot harder to do in The US than it is in Europe.

I also have a lot of questions. Maybe to start with the entity. So, of course, it's important that you set up the entity in the correct way. You don't want to do business with the European entity for too long in The US. You want to have that separate in The US entity.

Is it then sufficient to set up a US subsidiary, for example, as a daughter of The UK Ltd or the German entity? Or do you also want to add a blocker entity?

I like the term blocker entity that you use because this is good news for every lawyer when you work with them. Also with the CPAs. Mean, the the term blocker entity comes from the tech side actually. But we just adopted it because it blocks potential liability as well. So you have to envision it that way where you start off with just one entity for The US business.

Okay? You set up your LLC or your corporation depending on what works right, works the right way for you and your business. But then as hopefully your business grows and expands and The US business becomes more and more valuable with hopefully a lot of assets, which can be inventory or anything else. Yeah. Anything that may be collectible in a lawsuit against you.

Anything that a judge can take away to satisfy a judgment, you want to protect that. And if you only have one entity that is 100% owned by, for example, the Dutch parent company, then it's a whole lot easier to to get to those assets. But it certainly makes sense to have a second entity that, so to speak, actually blocks US courts, US judgment collectors from reaching whatever you may have. And that is usually a holding structure where the European entity owns the holding company, which is then a US entity 100%. And then that US entity has another subsidiary, which can also be an LLC or even numerous subsidiaries.

Right? The the more the then hopefully successful US entity has, the more it makes sense to have various different LLCs. Like one can hold all the intellectual property, another one can hold all the, real estate. And then one is the operating, entity. So I'm a big fan of blocker entities.

Yes. You have to set up two entities instead of one, which makes the whole thing a little more expensive. But look at it like an insurance policy, an additional insurance policy. And it makes my job trying to defend the company a whole lot easier.

But if I understand it correctly, it's something that makes more sense when there's also more substance in The US. When a company is just starting out, starting to do the first few sales, hire this first few employees, then one entity should be sufficient.

It's definitely better than nothing. But from a tax perspective, and I'm sure I'll talk to the tax experts about it, it can also make a whole lot of sense right from the beginning, to pay less taxes. But I'm not giving any tax advice here. From a legal perspective, it's just, the additional protection from potential liability in The US, which is why I love working with Blocker entities.

And you already mentioned the personal liability. So if I'm a founder in Europe and I'm setting up the US entity, how afraid should I be of any personal liabilities?

Unless you're a fraudster, you shouldn't be too concerned about it, because this is, the theme of piercing the corporate veil. I mean, we're setting up these entities for a reason. This is not like it's sometimes portrayed as your Cayman Island, PO boxes and no real substance behind it. Right? We're setting up the entities.

There are limited liability companies like an LLC, it's in the name. But then you can also get into partnerships where sometimes there's no limited liability. And there is personal liability which is also why most of the time partnerships don't make a whole lot of sense for Europeans. But to really answer your question, it's very, very difficult to get to personal liability in The US legal system. Yeah.

If we're talking about white collar crimes yeah. I have to go back to the term. You have to be a fraudster to really come to The US for all the wrong reasons, and, then you should be concerned about it. But you have to be concerned about that too in Europe. And in Europe, it's a whole lot easier to get to the personal liability than it is in The US.

Yeah. So how important is it to set up the directors and officers' insurance? Should every European company have that insurance when they are starting to do business in The US? Or are there certain criteria where you're saying like, oh, now you really need to have this?

I think the more you're in the services industries where the managers, directors, officers actually provide a service, it makes sense. Yeah. Where your customers rely on your input, your knowledge, yes. When you have a product that you're selling into the market, it's not absolutely necessary. In Europe, we all have a tendency to over insure as compared to The US market, right?

Which there's nothing wrong with that. But especially if we're talking about startup costs and The US being a more expensive market than Europe, then this may be something that you don't need right away depending on the kind of business you do. Just focus on your commercial general liability insurance, workers' comp, car and umbrella insurance.

And why is it more important when it surfaces? Because then it's easier to make mistakes or

Yeah. If I'm giving you bad legal advice you could potentially sue me, right? And that's why I as a lawyer have also professional liability insurance. Or my law firm does, right? Same goes with bankers, CPAs.

And for example, if you're a consultant, you're telling a company what they should do and then it doesn't work out and you want to protect yourself from it. Or again, going back to the fraudster theme, if you're here for the wrong reasons then, yes, it may actually make sense. But if you're a fraudster here, D and O insurance policy will find an exclusion and, you're still on the hook for it personally. So, again, if you're providing some type of opinion, some type of expert advice, I would consider it. If you have a product that you're selling and you want to limit your exposure when it comes to the liability.

And that's when the other insurance policies kick in more so.

And I'm also very curious because every few years we do a research project for TEPPs where we look into the do's and don'ts of doing business in The US. And I think we noticed, yeah, we always noticed that five or eight years ago, people were always very afraid of the product liability claims, as you mentioned all the newspaper articles with the worst case scenarios. But we are noticing a shift to more employment liability claims. And yeah, very curious what are your thoughts on this and what are some trends that you're seeing at the moment?

I would agree with that. I see the same trend where potential employers liability, whether it be through you firing an employee for the wrong reasons or not accommodating employees that may need accommodation. There are lawyers out there who are looking for these. Unfortunately, are lawyers out there who are looking for these types of mistakes, especially foreign owned entities make. Because I have to go back to the fact that there's a different legal system, right?

You look at resume that you receive from an applicant in Europe with the photo on it, date of birth, whether they're married or not, what gender they are. Those are all things you cannot disclose or you cannot even ask for as a US employer. So sometimes European companies make that mistake. And, overall, with a lot of policies that also, came into play over the past years, work from home, Also, the the workforce as a whole in The US being a whole lot more competitive than it used to be, and the labor market drying up more than it used to. These topics are are hot topics where my job and and other lawyers' jobs, and and I'm sure to a certain extent yours as well, is really to advocate for the Europeans, but also then to educate them on, what may be different in The US than it is in Europe and how to approach it the right way.

Liability on the product side is still probably number one and I'm sorry, number two, but employment is number one by now.

And then to educate companies, what are some of the most common employment liability claims?

Definitely wrongful termination, which you have to be careful that there are certain protected classes in The US. We're talking about age, anybody over 40. When you terminate that person, probably wanna have a a release agreement in place where they're signing off on, hey, I'm not gonna sue you based on termination because of age. And in turn, you provide a severance package, for example. National origin, gender, race, religion, all these things you don't want to terminate or you don't want to provide a reason to terminate.

Right? For example, one of the simplest things an employer can do when they are terminating somebody is that person, that individual down, but don't be alone in that room with him. It's pretty much the same setup that we have here now. If you two were to terminate me now, you'd be in a whole lot better position because you can vouch for each other and act as witnesses. Right?

I can't make anything up. Or sexual harassment, other work related instances that cause problems. Because again, I have to go back to the fact that in Europe, we're simply not used to these work related liability questions. So be careful when it comes to those things. Without disclosing any names and any individuals, it's just a prime example of what can go wrong.

And if it does, it gets very expensive very quickly in The US. So it was a subsidiary of a German owned business entity in Texas. They brought over a comparably young general manager from Germany at the time. And he was responsible for hiring employees. Went through several interviews and out of three candidates picked one who that individual thought would be the right fit for the company.

One of the candidates who didn't get the job then sent an email literally asking, hey, why didn't I get the job? And

Which is valid, right?

Which certainly you can ask that question. But, when you get an email like that, you probably want to pick up the phone instead of putting something in writing. And if you, pick up the phone, one other thing that I always tell clients is especially in in Texas and and some other, one party consent states, always assume that you're being recorded just like we are now. So be careful what you say. But the the big mistake that individual made, was responding to that email in writing, literally saying, and I kept a copy of that email.

Sorry but we were looking for somebody younger than you. And that is the prime example of an age discrimination lawsuits because that individual who didn't get the job was over the age of 40. And then, two weeks later, I got a nasty letter from a lawyer Right. Saying, unless you pay us a lot of money, we are going to sue you. And, we were still able to negotiate a very very fair, settlement.

But, yes, it just imagine you're a small company just starting up, looking for your first employee, not having a a big bankroll to rely on, this can break your US venture very quickly.

We also see that European companies with e commerce websites have been confronted with claims that they had violated the ADA and the California Prop 65. Can you tell us a bit more about that and how companies can protect themselves against these kind of claims?

Yeah. Definitely. I'm dealing with a Prop 65 claim California right now. Oh, shit. As we as as we speak, which frankly, is a headache, because there's simply law firms out there in the state of California taking advantage of it.

So if you're especially in the food industry selling a food product into California, you have to put a warning label on it or you're you could be subject to receiving a letter saying you we ran a lab test on your product and, here are the results. They exceed what California Prop 65, which I mean was an interesting idea, a good idea by the state of California to protect, consumers from high levels of mercury and and other chemicals that could be out there. But now law firms, unfortunately take advantage of it and seek to squeeze companies, and get a lot of money from them. So if you want to protect yourself against, for example, prop 65, you just put a warning label on it, on your product that you're selling into California. This is not something that you have to be considered read about when you're selling into Texas, for example, or Florida.

This is a California specific thing. You go to any McDonald's, Starbucks. There are other fast food providers. I'm not trying to advertise for anything. You walk in the door, there's a notice, a prop 65 notice at every fast food chain restaurant in the state of California just saying if you eat our product, you'll probably be exposed to all these chemicals.

So this is really the the best way to do it. I'm no marketer. Obviously, I understand that once you put a warning label on your product, it's a whole lot more difficult to sell it. But this from a legal perspective is what you have to do. If not, then, and there is a lab result that exceeds the limits which are obviously different for every Mhmm.

Chemical in California. Then you have to reformulate your product. You have to pay a fine, which, yes, indirectly goes to the law firm. Mhmm. And you get most of the time six to twelve months to reformulate your product.

Or if you don't want to do that, you put a warning label on it too. So sometimes it may just be a good idea to put it, on at the beginning at the outset so that you don't expose yourself to it.

Manny, you're German. And Germans are known for their directness. I hope it doesn't I'm not saying anything that's you know, not known.

I'm super offended now.

I was gonna say, did I offend you?

Very much.

Are cultural differences a thing that you discuss with companies or potential new clients that you assist?

All the time. All the time because that's also similar to to what you practice, right? Bridging that transatlantic approach to business because in Europe as you said, we do business a certain way. Whereas in The US, what makes you successful in Europe does not necessarily make you successful in The US. So it's my job not only to explain the laws and being a lawyer for the companies coming here, it's also really translating literally to the Germans and and society or culturally when it comes to doing business.

Because again, I go back to the point that as successful as you are in Europe and trying to bring that over to The US does not always work because, yes, most of European companies will have a fantastic product, which a lot of them have a better product than what is already available in The US market. But you also have to learn how to sell it. You can't sell it like you would in Europe where Germans are very much known for being technical about their sales and made in Germany, made in Europe, all these things matter. Whereas in The US pricing matters more as well as your network. Who do you know?

So sometimes having a US person, US sales manager be responsible and and running sales over here actually is one of the key components of successful European companies in in The US. And that's the beauty of my job is seeing very very many different European companies and seeing what the successfuls do right Mhmm. And what the not successful ones do wrong. And there is a certain theme, a recurring theme actually, to what these aspects are.

Do you care to share?

Yes. Of course. So, one of the big aspects of or big mistakes European companies make when they enter The US market is they want to do it on the cheap. The US is a very expensive market as a whole. I mean, you live in New York, I live in Houston.

Not just that but even services, your bank account, your insurance, everything is going to be more expensive than it is in Europe. And then European shy away from wanting to spend that money, whether it's on the service providers, but also their employees. Right? If you

salary of a sales employee in New York or California.

That's exactly right. When it comes to hiring a general manager and you pay that individual $80,000, you're gonna get a general manager with the skill of $80,000, general manager, which is way, way, way too low for what's going right in The US. European companies have to look at The US as one country with 50 different states. We're it's like selling into 50 different countries all at once. And then you include Canada and Mexico and you have an entire North American continent that you can sell into.

So naturally, everything will be more expensive. So don't spend $510,000 on your incorporation and then try to hire somebody for $60,000 running the show here. It's not gonna work. In The US, you have to spend money to make money. It's just as simple as that.

And it's going if if you have a very successful sales manager who is sure, enjoying a decent base salary Mhmm. But then a commission, if that person is selling $10,000,000, yes, that individual may earn more money than the general manager in Europe. Yeah. But that's a good thing

Yeah.

For for the European company in The US, because the potential upsides are just so great. And it goes back to the European products being sought after by Europe by US customers Yeah. As well as great quality product. But you just have to be able to sell them the right way and approach marketing the right way. Another aspect is, for example, you can't use a global marketing strategy and expect that this will also work in The US.

It doesn't because American consumers work differently. Whether you're selling b to c or b to b, it's just very different. And last but not least, which may not be a mistake but may be just how we do business in Europe in general is the risk adversity. You have to be willing and able to take risks. And if you do if you do it the right way, if you listen to your advisers, your bankers, your CPAs, your lawyers, your tops team, we have the experience and we've seen how it gets done successfully, then the sky is the limit.

And this is what makes The US as a market so prolific for European companies expanding here. The growth that you can accomplish within five years, ten years when you do it the right way in The US is by leaps and bounds, more bigger, more exhaustive and and amounts to a whole lot more than you will reach you will be able to reach in Europe. So this is really the goes back to the risk adversity. And the last point I'm going to make about the mistakes is that sometimes companies want to do it too soon when it's a startup that does not have a proven concept, where there's no proof of market, or they just have, for example, a software, have already have three rounds of financing in Europe and then come over here and look for a US investor. You're not gonna be attractive to venture capital, private equity funds, when not only your shares are already diluted, but you don't have a a proof of concept.

So sometimes it is valuable to be patient at the right time. But then when you go in, you will wanna do it the right way and go all in Yeah. Because the upside is, again, we've seen it, you've seen it, phenomenal.

Thanks so much, Manny. That was very valuable. A lot of great tips on what you shouldn't do and what you should do. So, thank you.

Thanks for having me. It was super exciting and hope to do this again soon.

I'm glad that we had this conversation with Manny. I think it was great that he mentioned the three pillars to how you can protect yourself against liabilities in The US. And both the setup of the entity structure, contracts,

and insurances are also important when doing business in The US. And towards the end, Manny talked about how to sell and pitch your products. And if you're curious and wanna learn more about pitching in The US, please go back and listen to our very first episode with pitch coach David Beckett on how to successfully create and prepare a pitch for US customers and investors.

That is still one of my favorite episodes. And this was already our fifth episode of The US expansion series. Our next and final episode of this season will be with Anouk Gottlieb, CEO of Belgian Boys. And that episode will be on how they grew their business to become successful and fast growing business that it is today.

And if there are any topics that you'd like us to cover for the second season of The US expansion series, you can send us a message on LinkedIn or reach out to us on bizdev@tabsinc.com, and we'll make sure to add all of this information in the show notes below.