International expansion: taking it to the next level
Published on 9th May 2016
Congratulations! You’re now an international company. You’ve done the basics in setting up overseas and putting your first people on the ground and for these purposes let’s assume you did them right. Hopefully you used our Europe in a Box package to get on top of all the legal essentials, and you’re A-OK from a compliance perspective.
So far, so good…. But now your CEO/CFO/Board/investors are talking about growth, about building on what you have, on global expansion. Less tangible than “open a subsidiary”, successful growth in international markets is a multi-faceted set of challenges: education, compliance and risk, research and instinct. So, how do you get that right?
Your best asset: talent and employment considerations
It’s no secret in today’s market that people are core to business success. The search for talent may have been the reason for your overseas expansion in the first place, but even if that wasn’t the case, your international recruits will certainly play a central role in your success. Hiring the right people is the starting point, and when taking your first step into a new market, acknowledging that you may need help is key. A good recruiter will not just help you get to the ideal candidates (because, let’s face it, they are probably currently employed), they’ll help you to brand and promote your company in a new market. It’s easy and understandable to assume that the hype behind your business in Silicon Valley will translate into the same hype in other markets, but that may not be the case.
Formalizing employment arrangements
Your first employee may have been flexible because you’re a startup, and accepted non-standard terms in their employment agreement. However, as you grow, you’ll find international employees less and less sympathetic to receiving abbreviated employment agreements, minimum holiday and few of the benefits they ordinarily expect. Contributions into a pension fund, even where not legally required, are standard in many countries and will be expected by employees. Vacation in excess of legal minimums is common for all but the most junior roles, as well as sick leave and enhanced parental leave in many countries.
Good international candidates will negotiate on these elements of their contract more than you expect them to. They will expect a notice period, and will not settle for being employed “at will” (a concept that really does only exist in the US). They may also take all the vacation you offer; just one reason why we don’t recommend you extend your unlimited vacation policy globally. Quite the opposite of being put off by a long form contract, prospective employees will respond better to a hiring process and documentation that align with their expectations and usual practice in their native countries. Take local advice to ensure yours match up and are up-to-date. Do not simply use your US offer letter and handbook overseas.
Major differences: Works Councils, health care…
As you grow internationally, HR operations will begin to present greater challenges. In many European countries, larger businesses will be required to have Works Councils which can be significantly involved in the day-to-day operation of the business, requiring consultation and in some cases, consent for key business decisions. Works Councils may be required once a company reaches a certain number of employees, though can sometimes be requested at an earlier stage. There can also be notable benchmarks when considering the number of employees in a particular market, after which certain benefits must be offered, termination becomes more difficult or additional regulations (such as health and safety) begin to apply. It is important to know what these are for each of your international markets. Failing to abide by the rules may be picked up by local regulators in each country, and is far more likely to be picked up by employees.
…options and stock plans
You no doubt offer stock in the form of options or RSUs to your US employees, and probably many of your international employees. In many markets, particularly in the tech sector, that will be welcomed outside of the US much as it is here. However, extending a stock plan into a foreign market can be a very expensive process, so it makes sense to ensure that the value is there, and that the stock will be appreciated before you do. If you do plan to extend your US stock plan to international participants, it should be properly localized for each relevant market as the tax treatment and reporting requirements will be different to those you are used to in the US. Failing to take the correct advice here can result in significant liabilities down the line – even if you choose not to take steps to avoid those (where that is possible) it is always advisable to know that they are there. And remember, in some cases, cash will do just as well.
Cultural fit: relocating key employees and getting immigration issues right
Silicon Valley businesses spend much time pondering how (and whether) to transport the company’s culture into a new market. New hires “on the ground” in international markets are probably essential for day-to-day operations – you can tap their local knowledge and network to build sales and to build out the team. However, if you really want to transport local culture, you’ll likely need to relocate a US employee. More often than not that will mean relocating someone reasonably senior, so it’s important to get that right. After all, no one wants to be responsible for getting the company’s president or SVP deported. In immigration terms, getting it right means planning ahead and making sure you know the rules. Who can you send, how and when, what can they do and for how long – those are all key questions. This is an area where forward planning is essential, as it can take a number of months to get the correct permissions in place for your US employees to travel and work overseas.
Visas and immigration
If you’re lucky enough to have a national of the particular market you’re looking at on your US staff and in the right role, then relocating them may be a good option. If not, you’ll need to familiarize yourself with the rules on what business travelers can and can’t do in the countries to be visited, and determine whether in any given case you need a visa. Within Europe, a foreign (non-EU) national with a visa for one European country does not have an automatic right to work in other EU countries; those rights are reserved for EU citizens. If you’d like to have a US citizen live and work in various EU markets, then to be in compliance with immigration laws they will need appropriate permission to work in each of them. Unfortunately, immigration laws are also relatively inflexible so it can be difficult to find creative solutions to some of the challenges. Finding an experienced adviser who can support you throughout a tricky, time-consuming and often bureaucratic immigration process is essential.
Time and experience shows that it is often not effective to impose US culture on international employees without adjustment. Benefits which are welcomed in Silicon Valley, such as free meals, bikes, and on-site yoga classes, are often less appreciated in international markets (and can be a health and safety challenge to boot). When transporting company culture, less is more. Free meals do not form the essence of your company’s culture. Think back to the business ideals upon which the business was founded, the mission statement which encompasses the values the company was built around. Those values can and should form part of the way you operate international offices. Benefits should be provided differently to suit and ensure that you are competitive in each of your international markets.
Your brand is everything, protect it!
If you haven’t already, now is a good time to think about protecting your brand internationally. You may already have registered a trademark for some markets abroad, but if not, consider which countries and regions are significant for you and the process for registering trademarks in each. In Europe, for example, consider whether country specific applications make sense, or opt for a Community Trademark Registration which takes longer and is more expensive, but protects you across the EU.
It’s a good idea to think about this not only for the markets you are already in but those you anticipate might be key in the future. Register your trademarks, and purchase the domain names for each core or potentially core market. And once you have them, note their expiry dates (which may vary widely) and ensure they don’t lapse. It will often be significantly more expensive to get them back once the company’s name and brand is established.
Tax and corporate structure for your European subsidiaries
One thing you’ll almost certainly have done when you first expanded into a new market is put in place an intercompany agreement between your new company and the US parent, setting out the relationship between the two and the services to be provided. You may have done this on a cost plus basis if you had US losses to use, and were setting up a sales and marketing office, or you may have set up on a different transfer pricing basis.
If you haven’t looked at that intercompany agreement for a while, it would be worth casting an eye over the provisions. Do they still accurately describe the way your US parent and your international subsidiary inter-relate? Is that still the best way to structure the organization? Have you since opened other international entities? Have you considered an overall international tax structure which might provide greater benefit? Have you included you internal data transfer policies in the agreement? Of all the things that adjust and blur over time, the way in which group companies operate is high on the list, which means regularly considering your best tax position should also be top of mind.
Go local, but be aware of compliance matters
You may have created a local law version of your website when you first expanded. You may even have a local language version in your international markets. If you are selling to consumers, localizing law and language may be essential to ensure compliance with consumer protection laws or to ensure that your sales contracts are valid and enforceable. Even in a B2B context, appearing to be local to the customers you are targeting gives a powerful message to buyers, particularly where you are selling into more traditional industries or government.
Think about localizing the legal terms, the language and the currency. Privacy is the hottest topic of all right now, surprising no-one more than the privacy lawyers themselves! You’ve probably already caught up on the changes, but in case you haven’t, it’s worth spending some time thinking about how this affects your company and its product. Also think about localizing for style and local culture. If the way you describe your company and your products forms part of your overall brand, consult a branding expert to ensure that you retain that consistency of message worldwide.
Your own space: get real about real estate
At some point in your expansion, in key markets at least, your business is likely to outgrow a temporary office or co-working space, and need its own premises. Finding space in blossoming markets can be challenging in itself, but negotiating leases can be an unexpected minefield for US companies. In certain markets, the UK for example, a greater level of risk for the property falls to the tenant rather than the landlord, particularly around dilapidations and repair, which are likely to give rise to a substantial bill for the tenant at the end of a lease term. Leases are also often much longer than is typical in the US. None of the differences should be deal breakers, but it is important to understand that the basic rules, cost and timing may not align with the company’s expectation.
Know your risk, and your appetite for risk
International expansion is inherently risky. There’s a risk in going into a new country full throttle, only to find the market isn’t as good as it seemed. There’s a risk in being tentative and failing to capitalize on opportunities. And, of course, there’s an inherent risk in not going at all. Where the balance lies will be different for every company, and based (among many other things) on size, funding, attitude and the likelihood of being on every regulator’s radar. It’s realistic to assume that most startups will neither seek nor achieve 100% compliance in every international market.
However, taking risk works best when the risk is known and assessed. Using the right advisers to help you determine the areas of priority and the areas where the status quo is good enough will help you navigate the various regulatory minefields and come to a conclusion where the risks are known, accounted for and most importantly commercially acceptable for your business and its investors.
Throughout the expansion process, one of the greatest assets for any company will be partners and advisers who get under the skin of your business and guide you appropriately. Osborne Clarke’s experienced and cross-functional international expansion team has advised hundreds of US companies expanding into Europe, working alongside them to understand their international goals and ensure those are achieved.