STARTUP RESTRUCTURING, GROWTH AND INTERNATIONALISATION

Startups are those newly created companies whose business model, because of the services or products they market or the way they do it, is highly scalable and has very high growth probabilities. As a general rule, and at least in their early years, startups are not highly professionalised and have fairly simple corporate structures.

The biggest challenge for Startups is to materialise and achieve these growth possibilities, and many of them find that internationalisation triggers investors to decide to bet on them. But are Startups really prepared, from a legal point of view, for this growth and internationalisation?

The answer will depend on the team, their experience and foresight but, in my opinion, and of course with the utmost respect and admiration for all those who dare to entrepreneur, most of them are not. With this post I would like to share those points that I consider most relevant when planning growth and internationalisation and show how that planning not only saves costs and future procedures but also represents a very important incentive for investors, thus translating into growth.

One Startup, several businesses

One of the most common problems we observe when advising companies of this type on their sale or expansion is that many of them not only have one line of business but also produce completely different goods or services, and yet they all belong to the same trading company.

In principle, except for some very specific regulatory issues, there is no impediment for a company to have several lines of business; in fact, it is a more than usual practice not only for Startups but also for more consolidated companies. However, problems or drawbacks will arise when, being all under the same company, we want to sell one of the businesses and continue with the others or when, for whatever reason, one of them is reasonably profitable and the other or others the opposite.

Let’s imagine a startup whose main business is a computer application for coliving (shared rental of homes) but which, derived from this, also enters into the business of design or maintenance of properties. Both businesses may be indirectly related but the truth is that they have absolutely nothing to do with each other. At most, they will share certain ‘common’ services of marketing, communication, accounting, etc., but not much more.

In this situation, we propose the first recommendation and that would be to separate both businesses into two different trading companies. The objective is none other than for each company to assume the material and human resources necessary for the development of each business, to separate future responsibilities, to prevent one profitable business from being contaminated by another that is not, and to facilitate the future sale or merger of each of the businesses independently.

The creation of a holding company

Obviously, each business and Startup has its own particularities that will have to be analysed in detail, but in many cases, such as the one I mentioned, it can be very interesting to set up a Holding company.

A holding company is a company whose main activity is the holding and management of shares and/or participations in other entities. In this case, the partners of the Startup in question would form the parent company or holding company and this in turn would form the operating companies or subsidiaries. The fact of structuring a Startup or any business group that has several businesses through a Holding structure allows us to:

1. Keep the group’s assets in a company not directly affected by the business.
2. Control the flow of capital provided by investors to the different subsidiaries.
3. In times of difficulty in one of the businesses, ensure that it does not financially contaminate the rest. 
4. Both in the transfer of the subsidiaries and in the obtaining of dividends from them, the tax regime, subject to certain requirements, will be 95% exemption on profits and dividends.
5. If any of the businesses need financing, the Holding structure allows the subsidiaries to apply for it individually, and only that business will be affected by the debt or guarantees requested.
6. The possibility of applying the tax consolidation regime and obtaining more efficient taxation of the group.
7. In the process of internationalisation, we can set up subsidiaries in different countries and apply for the Holding Company to benefit from the tax regime of the E.T.V.E. (Foreign Securities Holding Entities), which also entails the exemption of 95% of the profits derived from the transfer of these subsidiaries and of the dividends that they distribute to the Holding Company.
8. Decision-making in the operating companies and/or subsidiaries will be much simpler, more direct and uniform, as the Holding Company will control them, unifying them into a single company.
9. Allow strategic partners who are only of interest for one of the business lines to join the subsidiaries, without the need for them to also participate in the rest of the activities.
10. Establish different incentive plans for Startup employees depending on the subsidiary for which they work or provide their services.
11. On a reputational or perception level, a more professional image is projected and in some ways much more attractive to investors who see a well-structured group.

As we can see, there are many advantages, but it would be necessary to analyse, especially from a fiscal and financial point of view, several of the points in order to really see the benefits applicable to each company.

The Startup’s technology

In many start-ups, one of the most common problems, which usually becomes apparent just when they are thinking of giving an investor a stake in the capital or considering internationalisation, is that the technology and/or the brand they use, which is the basis of their business, is not owned by the start-up but by one of the founding partners.

The problem is understandable, as in many cases the project is started without having a company and the day-to-day requirements of the business leave this type of issue in the background.  The biggest problem arises when some time has passed and the technology and/or the brand have gained in value and it is not easy to pass this on to the company without tax contingencies. The most important aspect is not so much these possible contingencies, but rather that they generate certain doubts or red flags for the potential investor, which, logically, he or she values negatively when deciding whether or not to invest.

The ideal situation would be to start from the outset through a commercial company, making it the owner of all the industrial and intellectual property of the group and, if this is not possible, at least regulate through a Shareholders’ Agreement how it will be contributed, when and the consideration that the owner will receive.

The internationalisation of the Startup

As I have been anticipating, one of the most important steps in a Startup is its internationalisation and in many cases, this step means the success or failure of the whole project.

The first step, once the country in which to start has been chosen, is to decide, depending on the legal regime in that country, which legal form to use to make the landing. Regardless of the different forms that exist in the country of destination and the requirements for foreign investment there, it is best to do so through a newly created vehicle or company. This new foreign company will be a subsidiary of the start-up or holding company, if there is one.

It is during this type of process where many of the ‘contingencies’ or points that, as I mentioned, are not well guaranteed or structured within the company become apparent. Consider, for example, that this new company abroad must in some way have the right to use the Startup’s trademark, so the question will arise as to who is the owner of the trademark and, therefore, who has to license or provide the use of the trademark. This type of problem, although ‘easily solved’, delays the start-up and obviously affects the business and growth.

One of the most important issues surrounding the internationalisation process of any company is the legal and tax issue. When it has been decided in which country or countries to begin expansion, mainly for business, geopolitical, economic reasons, etc., it is more than necessary to know the legal and taxation issues that will be involved in the business in that country or countries. On the one hand, we must focus on what we could call ‘internal’ legality and taxation, and on the other, ‘international’ taxation.

A local specialist should be able to advise or issue a report on the following aspects at least:

1. Possible types of commercial companies and their requirements (name, share capital, registered office, minimum number of shareholders, etc.).
2. Requirements for the Administrative body. In Spain, it is not compulsory, but in many countries, the person or persons who will hold the position of Director of the company must necessarily be resident in this country.
3. Registration of the trademark and the rest of the group’s industrial and intellectual property. Let us imagine that we have everything ready and constituted but we have failed to confirm whether we can operate with our trademark without infringing any already registered rights and we find that there is an identical or very similar trademark that requires us to re-brand.
4. The legality of the activity in the country of destination. Every day, more and more disruptive businesses emerge and in many cases, what is legally viable in one country is not totally viable in others, or the bureaucracy or costs make it totally unfeasible. A clear example is the case of Uber or Cabify, whose business models, in many countries, even in the European Union, have not been extrapolated.
5. We must know what the taxation of the business is. At this point, the aim is to clarify which tax regime will be applicable, whether VAT will be charged, how Corporate Tax or similar works, etc., to see how it affects the business plan of this internationalisation project.
6. The taxation of corporate transactions and structural modifications such as capital increases, mergers, spin-offs, sale of production units, etc.
7. Accounting obligations and the needs and costs for the maintenance of the subsidiary company. 
8. The labour regime and the need or not to have employees.
9. Finally, and although it may seem contradictory, in my opinion it is very important to know the dissolution and/or liquidation regime of the company and the costs involved. In many cases this point is overlooked and when, for whatever reasons, it is decided to close the operation, the client is surprised to find high costs and a tedious process and, if he had known about it, he would have opted for another option such as the international transfer of domicile or being absorbed by merger by the parent company, for example (a very practical option in many cases).

With regard to international taxation, it is advisable to confirm the following points in conjunction with the local advisors in the destination country and the Start-up’s own advisors in Spain or wherever the Start-up is based:

1. The existence of an agreement to avoid double taxation signed between the destination country and, in our case, Spain.
2. The taxation of currency outflows from the destination country. Some countries tax the outflow of foreign currency from their borders. This is a very important point which visibly affects the business plan of the project.
3. Taxation of dividends and interest paid from the destination country to Spain. On the one hand, the parent company will have to make investments in its subsidiary (via capital increases, loans, etc.) and on the other hand, it will want not only to recover the investment but also to obtain profits, so it must be fully aware of the tax implications of this return.
4. The parent company will most likely have to lease or license the use of the brand, technology or other assets of the parent company. Such licensing or leasing not only has tax implications in the country of the parent company, but also from an international point of view, so it will have to be properly analysed.
5. We will have to bear in mind that, despite being in another country, the subsidiary will belong to the parent company’s group and any transaction carried out between them will be a related-party transaction, which obviously has tax implications and this is very important when it comes to setting the compensation, which will have to be at market value.
6. Finally, as I mentioned in the section on the creation of a holding company, the E.T.V.E. regime applicable to Spanish companies with a minimum percentage of shareholdings in foreign companies is very attractive, so it will be necessary to confirm that they meet the necessary requirements to be able to apply for the application of the regime.

Conclusions

As we can see, there are many issues to take into account in a Startup when planning its growth and internationalisation, and on many occasions the frenetic pace of an enterprise leads to neglecting them, which impacts future sales and inefficient growth. In my opinion, the professionalisation of a Startup should not only start by taking care of the business and its team, but also by improving the corporate structure, which will undoubtedly be very attractive and save costs and processes.

This article includes general information and it does not provide professional or legal advice.