Stock ownership bestows shareholders with rights and obligations that are defined in the shareholder agreement (or operating agreement, if the company is an LLC). When creating your startup company’s shareholder agreement, there are significant issues that you–as a foreign entrepreneur–should particularly consider.
STARTUP CAPITALIZATION
Shareholder agreements specify the amount and type of contribution made by founders in exchange for equity. Customary contributions include:
- Cash
- Services (‘sweat equity’)
- Intellectual property (eg, copyrights, patents, trademarks)
- Real estate
- Capital equipment
While cash and sweat equity are frequently used to launch startups, use of these types of contributions can present challenges for foreign entrepreneurs who plan on moving to the US. Recall that the E2 investment visa authorizes foreign entrepreneurs to live in the US to direct and develop their startup company. When applying for an E2 visa, foreign entrepreneurs must demonstrate that they’ve made a substantial active investment in the company.
So what constitutes an active investment? For an E2 visa application, active investments are usually demonstrated by presenting invoices that were paid by the visa applicant’s company to third parties. A visa applicant’s passive cash contribution in exchange for company equity will not suffice. In the same vein, the founder’s sweat equity is generally not viewed as an active investment in an E2 visa application.
- TIP 1: Although you should not commingle your personal funds with company funds after incorporation, it is inevitable that you will incur startup expenses before incorporation. When you make pre-incorporation purchases, be sure the value of those assets (documented by invoices) is reflected in your shareholder agreement and E2 visa application.
- TIP 2: Similarly, when you ship capital equipment and merchandise from your home country to the US, don’t forget to include those international shipping costs–which can easily amount to tens of thousands of dollars–in your shareholder agreement and E2 visa application.
- TIP 3: You may receive company equity in exchange for capital equipment that you acquired years ago in your home country. In such cases the invoice price may not reflect current market value in the US, or you may have lost the invoice. Don’t despair! Simply get a new appraisal of that equipment, and then use the current values in your:
- Shareholder agreement
- IRS tax return
- E2 visa application (You’ll also be able to include the cost of appraisal in your E2 visa application.)
COMPANY GOVERNANCE
Because boards of directors provide valuable oversight, shareholder agreements often dictate how their boards are to be elected and composed. While startup companies are not obliged to have Americans on their board of directors, foreign entrepreneurs should consider doing so for a couple of reasons:
- If the board is exclusively comprised of foreign directors, such homogeneity may negatively impact the startup company’s success when seeking investors in the US.
- Remember that the E2 visa is an “investor visa”. The business plan that accompanies the E2 visa application should therefore stipulate that the new company will employ at least one American.
While many E2 startup companies plan on hiring Americans for administrative and operational roles (eg, receptionists and salespersons), it is sometimes advisable for an E2 business plan to describe plans for hiring an American board member.
- TIP 4: If your startup company will be seeking venture capital, consider including a stipulation in your shareholder agreement (e.g., in the description of the board’s nomination process) that at least one board member will be intimately familiar with the US market.
DISPUTE RESOLUTION
When contemplating business formation, entrepreneurs often structure their business as a corporation or LLC in order to limit their liability in legal claims brought by customers and business partners. But the risk of litigation also exists for legal disputes with shareholders. In this regard, founders have some discretion in deciding how and where shareholder disputes will be litigated.
For example, if the company’s founders all reside in Germany, they can include a clause in their shareholder agreement that selects German courts as the exclusive forum for any ensuing litigation. Such a clause can be quite helpful in cases where a US startup company is wholly owned by a small foreign company that will issue shares to a newly hired American CEO as part of an incentive package. Of course, if the foreign founders plan on seeking investment from venture capital firms, a dispute resolution clause that calls for foreign litigation will be problematic.
- TIP 5: If neither you nor your co-founders will live in the US and you do not plan on taking the company public, consider including a clause in your shareholder agreement that mandates a dispute resolution forum in or near the country (or countries) where the co-founders reside.
