Guest authored by Emily Ayoob, Lawyer, Chair of French Desk – Partner at Tarter Krinsky & Drogin
The only thing certain these days is uncertainty. Many early-stage companies, especially those seeking to raise funds in the United States or expand into the US market, are facing unprecedented economic and political conditions that make defining a clear strategy difficult, to say the least. While each company will have to adapt its approach based on its particular circumstances, we discuss below a few key trends we’ve observed as methods to hedge risk and reduce friction.
US Capital: Corporate Structuring Trends
Many early-stage companies, when discussing with US investors, whether business angels, VCs, or others, are confronted with a hesitancy to invest directly in a European entity. Frequently, this issue can be resolved with two potential solutions:
1. An earlier “flip” of the foreign parent and US subsidiary, so that the US entity becomes the top level and therefore the investment vehicle.
2. The creation of a US special-purpose vehicle for US-based investments may also reassure such investors.
While these solutions are not necessarily new or innovative, they may be considered earlier in the life of a startup than before.
M&A, Strategic Partnerships, or Family Offices
If faced with more cautious responses from venture capital investors, early-stage companies may turn to more strategic investors or family office investors to raise funds. Alternatively, strategic partners or even merging with or acquiring US local interests could be an interesting solution, as it may reduce market friction for US operations. From an optics standpoint, this could provide the benefit of allowing the company to emphasize locality in production, the creation of US jobs, and compliance with local rules.
How to Attract Such Strategic Investors
However, such strategic investors or partners may have more stringent requirements when performing due diligence. As such, there are a few recommendations to render discussions with such investors more fluid:
. Prepare a Ready-to-Go Data Room: Maintain a data room with the company’s basic legal and financial information to avoid last-minute searches for requested information.
. Clean Cap Table: Ensure clarity around share ownership and type of equity, avoiding unusual arrangements or messy structuring. The related documentation should also be well organized.
. Intellectual Property Rights: Ensure that intellectual property rights relating to products or services are well-defined, documented, and enforceable. Early registration and water-tight assignment or licensing provisions are recommended.
. Employment Law Compliance: Review proper classification of employees and contractors to make sure the company is compliant with all local laws.
. Data Privacy and Cybersecurity: Ensure compliance with relevant data privacy or cybersecurity rules. An early audit on company practices and clear internal policies and security measures will reassure partners.
“Hot” Sector Issues
Companies with activities in certain hot or sensitive areas must address legal and regulatory compliance well before considering entry into the US market. For instance, companies in regulated industries such as FinTech, HealthTech, or AI should explore obtaining opinion letters as to their compliance with regulatory standards. Clients in these areas should be aware of potential exposure to Export Administration Regulations and perform internal reviews of CFIUS (the “Committee on Foreign Investment in the United States”) compliance requirements. Some entities may choose to create two separate internal governance boards to ensure compliance in these areas both in the EU and the United States, instead of maintaining a one-governance-led compliance system, which could have internal weaknesses or inefficiencies.
Conclusion
In conclusion, navigating the complexities of entering the US market in the current fluctuating conditions requires early-stage companies to be proactive and strategic. By considering corporate structuring trends, exploring alternative funding sources, and ensuring thorough due diligence and compliance, companies can better position themselves for success. While uncertainty remains a constant, these strategies can help mitigate risks and pave the way for a smoother entry and accelerated growth in the US.
Tarter Krinsky & Drogin
Tarter Krinsky & Drogin is a bicoastal midsize law firm with over two decades of experience and an international reputation. The Firm offers holistic legal advice and creative strategies across 30+ practice areas.
The French Practice, led by Emily Ayoob, specializes in assisting French-speaking clients with cross-border transactions, including mergers and acquisitions, joint ventures, business formations, contract drafting and negotiations, employment law matters, and intellectual property law matters.
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