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Trae Nickelson: Hello. Welcome back to Starting Up & Right: Conversations with a Startup CFO. I am Trae Nickelson, your co-host. Joining as always is Ryan Keating, startup CFO, managing partner of Keating Consulting Group, and your other co-host. Ryan, good to see you, man.
Ryan Keating: Trae, good to be back. Nice to talk to you.
Trae: This episode, the subject of our conversation is a specialty, but it's not an uncommon specialty. It is international startups that want to establish some kind of presence in the US for a variety of reasons. You often get... I know there's a large swath of your clients that fit this category; Non-US startups or large companies that want to establish some sort of presence in the US. They come to you from the ground up asking how do you do it. Oftentimes, you reach out to today's guest, Niyant Kumar, CEO of Fernway Solutions, as one of your go-to partners to help guide everybody through that process. Why don't you start by, just kind of talk about your relationship with Niyant, with Fernway, and when do you reach out?
Ryan: Yes, happy to. I think I've been working with Fernway and Niyant since the beginning. They've been around about three and a half, four years. It's been a really tremendous value to our clients. When I'm talking to a client and the term international comes up, I immediately think of reaching out to Fernway. At a very high level, that's how encompassing they are in terms of being able to help businesses navigate what it means to either be an international company that wants to start selling or having operations in the US or going the other way. The US-based company wanting to start to sell or reach out overseas.
I'm excited because it's a very specific topic. Boy, for the clients that are in this situation, it is a really relevant and very knowledgeable firm that we'd love to partner with and reach out to, so looking forward to this conversation.
Trae: With that, Niyant, you are now on screen. Welcome to the conversation. Appreciate you joining.
Niyant Kumar: Thank you, Trae. My name is Niyant Kumar at Fernway Solutions. My personal background that's probably been touched on is that I'm a licensed CPA with a passion for helping early and growth-stage businesses, and particularly technology companies, on cross-border structuring, tax planning strategies, and compliance requirements in the US. Fernway Solutions as a business is a licensed accounting firm that works very closely with founders and businesses on tax advisory and compliance matters and to optimize the overall corporate structure in the US.
Trae: Nice. Let's start. Ryan, what's the first question you usually reach out to Niyant with?
Ryan: Let me maybe describe a very popular use case and then I think Niyant can do it a lot more service of going into the different areas they help. When I'm in a conversation with a potential client, usually, what happens is when I think of Fenway is they're based in another country. They're selling oftentimes some physical product. They manufacture something. They want to start selling in the US. They want to enter the US market. They have nothing. They don't know what kind of US entity they need to establish. Since they don't know that, they certainly don't have an EIN, which you need to open up a bank account. They cannot sell. There are steps that have to be taken before you can just come into the US and start selling product.
The very first thing that we talk about is, what kind of corporate entity should you set up based on the relationship with the parent, and maybe the strategy for fundraising, or where the inventory is going to be held? There's all sorts of these interesting considerations. That's when I immediately say, okay, we need to reach out to our partner, Fernway, and get really the expertise in here.
Niyant: Thank you, Ryan. As I'm sure you probably already know, no two businesses are ever the same. That said, the initial challenges we generally see startups face tend to fall into one of probably two broad categories. Number one, making sense of the legal, tax, and compliance landscape in the US, in particular, for foreign businesses that don't have their familiarity. This primarily encompasses an understanding of what it entails to do business in the US, how to set up an entity, how to open up a bank account, the most effective way to hire and pay employees, tax implications upon creating a foreign-owned business in the US, and requirements to maintain compliance in the US.
The second area that then probably starts to become relevant is to determine the best structure for the business in the US. This starts to transform into a fairly elaborate conversation surrounding one or more of the following key questions. What type of entity to establish? If there are multiple entities as part of a corporate structure, which is quite common for cross-border business, who should own whom? Which entity should the business use to raise its external capital from investors?
For technology companies, under which entity should intellectual property be located? What is the most effective way to move cash from one jurisdiction to another? Is my structure optimized from a tax perspective? Also, is my structure optimized from an exit standpoint? These are probably a few questions that we typically come across, but as an advisor working with non-US start-ups, this really requires an initial and ongoing educational process so the founding and management team are quite aware of the requirements in the US but also to ensure that our recommendations align with the objectives of the business.
Trae: That's interesting. I'd imagine the objectives-- You've mentioned every case is different. What are some of the first questions you ask of a start-up or even the information you need to even start to assess what the opticals are going to be or what next steps are?
Niyant: Yes, Trae, good question. I think a key step for us is understanding the business itself, the precise product and services that are being sold, who the target customer is, and the revenue model. These are fairly fundamental questions but quite important before kicking things off.
The next step, and probably the most significant, is to have a good understanding of the objectives of the company. Number one, what are the initial objectives of the founders? What is the primary intent of setting up an entity in the US from the founder's perspective? Number two, what is the growth strategy in the US? Is the business looking to build a team, to acquire customers, to raise capital, to set up distribution, really getting an understanding of the steps the business envision is taking to scale operations, not just in the US, but in the global market.
Number three, and probably an exciting topic for a lot of our clients is understanding their potential exit scenarios. Not all businesses are designed for exit or have an exit as their primary goal. With that being said, businesses that are profitable often are more focused on managing a lean P&L and ensuring tax outflows are minimum.
On the other hand, businesses that are looking to reinvest earnings into growth, in particular, technology companies that are often keen on ensuring that their structure is optimized from an exit and shareholder level of perspective, the tax implications of these are primarily influenced by the composition of the cap table, whether these are individuals or institutional investors, are the founders residents of the US with some of the jurisdiction? Where is the potential buyer likely going to be located? Which can sometimes be a difficult question but an important one. Whether the business anticipated doing a sale in the future of its key assets for its entire stock.
All fairly loaded questions, but overall, without some context on these three key points, it's often difficult to really guide a business on how best to execute the corporate plans in the US. Once we have clarity on these areas, it can then become more practical for us to advise the business on the most effective corporate structure going forward.
Ryan: That's interesting. Does it make a difference with what they're selling? Because you made a distinction between say service versus hardware versus inventory and how you would advise them to set up.
Niyant: Yes, absolutely. For a product company, you'd obviously, in the US, think about the sales tax implications that would come into place. There's also a whole holster of requirements with respect to what we call transfer pricing requirements, meaning at what price will a US company purchase the products that are being produced say in a foreign location, or if the US company is being used as a distribution arm, then what will that pricing framework look like?
For a service company, typically the framework is a bit different, and often, this does influence the actual location of the intellectual property which then also influences the potential jurisdiction in which the final exit will potentially take place. It's all very relevant questions which helps us get a better feel from a tax, structure, and compliance standpoint but also thinking about some of the legal nuances and exit considerations that might come about in the future, how best to structure the framework.
Ryan: A lot of the clients that we work with or that reached out to us in this scenario are immediately trying to set themselves up to attract US investors. My limited knowledge in this, I'm like, you got to be a C-corp and the value of the business has to be on the cap table that the investors are buying into. Can't keep the intellectual property overseas and ask a US investor to set up a C-Corp. I know there’s exceptions to probably everything I just said, but-- That’s really where my focus is at least when the clients reach out to me, how much of an impact does that have in terms of where your advice is based on their funding strategy, I guess?
Niyant: Well, it has a pretty significant impact. A lot of the points that you touched on, Ryan, are fairly relevant to how best to structure the business. The template solutions, if I may use that terminology in terms of setting up a Delaware C-Corporation, which often seems to be the default, is not a bad structure for a lot of businesses, but it may not be necessarily the most ideal structure for every business.
A lot of businesses, in particular when the founders are located in the US or they are looking into an exit in the US at some point in the future, they're always thinking about the exit, and particular for a technology company. Having the equity infusion into the US company but ensuring that the corporate structure is designed in a way that capital gains at the point of sale are either minimized or eliminated is optimized as best as possible.
That being said, a lot of times the structure does not even lend itself as to what is ideal from a tax standpoint, but it's often governed by what's required from an operational framework. If the operations of the company are primarily driven in an overseas location, for example, development of a technology or location of customers or the location of a CTO or the CEO, then often that does influence the location of the IP, the location where the building needs to take place, and maybe even the corporate structure from an equity infusion standpoint.
All in all, well, a lot of advisors do come with some thoughts and initial frameworks that do make sense for most businesses, often it is important to ensure that the advice is also clear.
Trae: Niyant, you brought up one of the considerations, or one of the things that you talk through is who should own whom? A lot of times you're setting up a US entity and one of the factors that drive-- I have seen cases where it's been recommended that the US company should be the parent and that that causes some disruption. What are the factors that determine who should own whom I guess?
Niyant: Before getting into the ownership side of things, a lot of times in the initial stages, startups are looking to set up an entity because the more fundamental reason is they want to put a face to the business in the US. They're looking to hire employees, maybe do some billings in the US. For a majority of those scenarios, the corporate ownership structure typically does not have a material bill.
The ownership structure comes into play in usually one of a few scenarios, number one being, which jurisdiction are you typically looking to raise capital? If that's going to be in the US, then likely then the parent company would need to be the US entity to ensure that you optimize from an exit standpoint. You also want to start thinking about, where's the potential exit likely going to take place? While that seems like a loaded and difficult question, it often boils down to, well, where is the value of the company? Where are the customers located? Where's the target market is located? Where is the intellectual property likely going to be located? That starts to then drive forward the discussions running? Who should be the parent company of your group structure?
An important component that’s fairly technical starts getting to, well, what are some of the tax and cash flow and legal nuances that should also be considered? There’s no point having a corporate structure which is generating profits and cash inflows, but to move that cash from one jurisdiction to another or from the corporate structure to the shareholder or founders starts to become very tax-inefficient, and obviously, that's not a good structure for any business going forward. To ensure that you optimize from a tax perspective as well also starts to become relevant beyond just thinking about the exit and the initial capitalization of the business.
Ryan: You used a good term which I think most of our clients fall under, which is that they're going to reinvest earnings to drive growth. I imagine that puts them maybe in a different category than people that are trying to optimize cash flow and minimize tax and pull as much out as they can. It sounds like a lot of what you do is really almost interview the company. What are your goals? What do you want to get to? What are you trying to accomplish? What are the steps I guess that you have to take a company through to determine this? Do you just sit down and speak to them? Do you like to get your hands on their investor presentations? How do you work with a company to flesh all this out?
Niyant: That's a good question, and that's something that I think has probably defined the framework in which we interact with our clients, Ryan, which is that it's difficult for us to get too deep into providing advice without really understanding the business as I talked about before. Getting to know the business, getting to know the products that are being sold, getting to know their operational intent before putting forward any advice from the tax, legal, or corporate structure perspective, and in just recognizing that no two businesses, even though they may be in the similar in terms of similar product or service field are ever identical.
As a foreign startup looking to expand into the US market, you only know what you know, and this can often lead to a number of scenarios where founders and businesses with very limited knowledge of the US landscape often find themselves with a structure that leads to significant operational, tax, legal, or compliance issues in the future.
In such instances, we generally find that as an imperative for advisors like us to ensure that we are partnering with our startups to ensure there's a constant flow of advice and information all the time. Also, often there's sometimes an inclination by some startups to perhaps undermine getting professional advice in the initial stages of the business. On the contrary, we would actually argue that it is probably a critical junction for such startups to ensure that they're getting good advice upfront, which then helps to optimize their structure and compliance framework in the future.
When you look at a business and in hearing this distinction to your question earlier about whether the business is profitable and potentially looking to reinvest some of that cash back into the business versus trying to ensure that some distribution taking place for the shareholders a lot, I would say that's going to impact a number of key questions surrounding what is the best framework, how to move cash from one jurisdiction to another, any dividend, repatriation, or tax optimization strategies the company should be considering. Again, ensuring that we're not moving forward with a template without understanding a clear sense of how the laws are designed in such situations.
Ryan: That's a lot of things to take into consideration. That's interesting. I always tell clients that part of our value is knowing when to bring in the right experts. Especially when they ask about tax and when it gets into international and the structure, and I'll say there are people that dedicate careers to understanding this. Just hearing you talk through this right now, you can really get an appreciation for how many levels and layers of detail there are that you need to be able to understand to give proper advice. It's really interesting, and there's a lot of layers to it. You're right. There's no two situations that are the same clearly.
[crosstalk]
Trae: Are there any common surprisingly difficult issues? You mentioned every case is different, but are there any commonalities? For instance, is it hard to set up a bank account? What are the things that as a founder of a non-US company coming to the US, what's going to surprise me that's hard to do in the US?
Niyant: Well, oftentimes, in particular for foreign businesses, and particularly if you're coming from certain jurisdictions where it takes a fair amount of time, effort, or compliance hurdles to get a company set up, to get a bank account going, a lot of those frameworks from the US are quite optimized. Even during COVID scenarios, we've seen some delays in some of these processes, but overall, our experience has been that there is a fairly organized framework in the US.
A lot of foreign businesses often recognize when setting up a company in the US, is getting a company set up is fairly straightforward, and usually, it can be set up fairly quickly. The key is to ensure that you're getting the right advice to ensure that you're clicking buttons and setting up that structure in the most effective way. Once the company is set up and you now have a legal entity to which you can legally contract and enter into contractual arrangements with customers or vendors or employees in the US, but obviously, to transact, you need to have a bank account.
While a lot of banks ideally you'd require an individual to be present in the US, a lot of international banks have to build a framework to set up bank accounts in the US through their affiliates or other remote means that they have without having any of the directors, founders, or officer's actually being present in the US. Those components have made setting a bank account relatively straightforward. Although there are some nuances that businesses should be aware of, for example, the process involved in obtaining an employer identification number, which is a tax ID number that is required in the US to set up a bank account.
Sometimes these scenarios can lead to nuances, which can cause fairly significant delays in the processing of an AI number, which then delays the processing and setup of a bank account. All key areas for a business to consider and ensure that they're working with a partner to try and streamline that process.
Ryan: It's interesting. We see the EIN, which you can only get once you have an established US structure, being probably one of the very first and longest hurdles to get over for these companies. We've seen that expand during COVID as well. It's taking many times as long as it used to take, getting an EIN. Is that usually a requirement that you'll see with most companies you work with, that you get involved so early that they need to set up the initial--? I know when we bring you into a client, that's usually the scenario. In the rest of what you do, I'm sure you work with other folks besides us, is that also usually a first point companies reaching out to you do not have a US structure and need to get the EIN to even set up the bank account?
Niyant: Absolutely, Ryan. In most cases like any founder that's looking to go all guns blazing and expand their operations in the US at lightning speed, often, there's some hesitation to proceed until they've got clarity as to their plans in the US. As soon as those plans have been identified, the intent and desire to go forward with the incorporation process is usually fairly rapid, which usually means for an advisor like us, the expectation is to set up a company, get an employer identification number, access to the bank account, setup process as rapidly as possible.
Yes, those areas do start to become fairly time-sensitive, and as you mentioned, depending on how some of those processes are managed, for example, obtaining the EIN number, there's processes through which those can be obtained instantaneously, through an online submission. There's also processes where, if not done appropriately, can take about six to eight months that we've seen happen with a number of clients during this COVID scenario. Again, ensuring that these steps are being done in the most effective manner is probably the best way to guide our clients.
Trae: Niyant, how often does a client come to you and they've already made a mess of things? Maybe they've made some assumptions, maybe they didn't really set things up initially right and you have to untangle some things. What are some mistakes that you see that should be avoided? Is that a fair question?
Niyant: I think, Trae, to that point is the number of scenarios that we typically come across. One of the commonalities that we see with businesses is, as I alluded to earlier, is really undermining the essential and the importance of getting good advice upfront. This falls into place in a number of different areas. The classic scenario that we typically come across as well, operations are fairly limited, so we believe that our compliance requirements are fairly straightforward. We'll get a tax return filed, and we don't see too many issues surrounding that.
From a structure perspective, we're not too concerned because we're thinking that the exit is quite a ways down the road and we can look at these instructional alternatives at a later stage. Some of the issues that we come across in those instances are, from a compliance perspective, in particular, when there's foreign ownership or foreign subsidiaries involved, the US has moved to a regulatory system that requires a fair amount of disclosures with respect to their foreign ownership or foreign subsidiaries, and including any transactions that might take place between those parties.
Noncompliance with those disclosure requirements, independent of whether or not the company in the US was profitable or not and there's any tax implications or not results in a fairly significant, usually a $10,000, $20,000 per form, per filing, per year penalty that becomes applicable on an automatic basis. That on its own starts to become fairly relevant for a client to ensure that from a compliance perspective, they're getting the right advice and ensure they're working with a partner that is familiar with some of those nuances.
From a structure perspective, some of the issues that we often see that come about is, well, thinking about, have you given adequate consideration to your cap table? Thinking about, where do you intend to raise capital down the road? In particular, for foreign businesses that are located in offshore jurisdiction that often set up an entity outside the US and in a later stage decide to flip that structure and make the US company the parent company because now they want to expand into the US, they look to build primarily customers in the US and envision that the exit will also likely take place in the US, but a lot of times there's a tax cost to making that flip happen, which obviously starts to become fairly detrimental, in particular for technology companies and science companies that are often not profitable for them to migrate to a different structure, just means an additional hurdle and a tax obstacle for them.
Ryan: A lot of what we talked about is the most popular scenario we see on our side, which is an established company that's international that wants to start selling and doing business in the US, but we often see as well the other scenario. If I can ask a question about, again, thinking about our clients, thinking about if I want to answer some of our client's questions, it's a US-based company, venture-backed, selling a product, generating revenue, whether it's a service or product in the US, they want to start expanding internationally, when is the right time to think about Fernway and what are some of the complications? Are they the same just solving for the other direction, or is it a whole different set of considerations?
Niyant: Well, that's a great, fantastic question, Ryan. It's a bit of both. There are some commonalities and common issues that foreign businesses coming into the US and as well as US businesses that are expanding internationally would need to consider an applicable both ways, but for foreign businesses, or in particular US companies that are looking to expand internationally, there're two specific regulations that are worth mentioning.
Number one, the FDII, Foreign Derived Intangible Income provisions that allow a US corporation to claim a lower effective tax rate of around 13%, 13.125, on foreign revenue, which is a substantial benefit when compared to the regular corporate income tax rate of 21% under the current law. The second, but opposing set of regulations are the GILTI provisions that require a US company with foreign subsidiaries generating profits outside the US to pay tax in the US, even if no cash has been distributed from the foreign subsidiary to the US [inaudible 00:25:56].
Overall, these are a complex web of regulations that we can certainly advise startups on as we evaluate the overall corporate structure. Going back to Trae's earlier comment, the timing of when that introduction takes place often becomes relevant, because while a business might incept itself as being at a fairly initial stages of its operations, being aware of some of these complexities, being aware of some of these opportunities starts to become quite relevant as they think about the operational framework and corporate structure.
Trae: Yes, thanks, guys. That's great content, great educational dry material we've gone over. Niyant, a little bit about you. You're Bay Area, right? Tell us a little about friends, family, what you do on the weekend and for fun.
Niyant: Bay Area, absolutely, Trae. I've actually lived in a few different locations. I was born and raised in Kuwait. I've spent some time in India. I've spent a fair amount of time in Canada and the UK, and now in the US. That obviously leads into my favorite things to do is travel and food are probably immediate ones that come to mind, which actually works quite nicely with our firm's focus on international clients. I get to travel to various locations and try a variety of different cuisines. [crosstalk] Other hobbies probably include-- Absolutely. Other hobbies probably include rock climbing, going on hikes, Bollywood music, and playing squash.
Ryan: Wow. Rock climbing, you should be interested in paying attention to that and the Olympics this year since it's the new event.
Niyant: Yes, I did catch up on that. I've not been following it as much as a sport, but I enjoy playing it for sure, participating.
Trae: I'm looking forward to seeing some of your Bollywood dancing.
Ryan: Since we're talking personal, we actually came to know Niyant in Fernway because his wife is amazing operation startup person that was at one of our client's. We worked very closely with her and so I'm really happy to continue this relationship because I've always enjoyed my relationship with her and now it's extended into Niyant, and I feel that we've been able to hold on to that. On a personal level, I enjoyed this. I enjoyed bringing Fernway in, I enjoyed having conversations and keeping up with them.
Niyant: Thank you, Ryan, for saying that, and the feeling is definitely mutual.
Ryan: Nice.
Trae: Well, thanks, guys. Thanks, Ryan. Thanks, Niyant.
Ryan: Yeah, thanks, Trae. I enjoyed it. Thanks, Niyant. Thanks for joining us today.
Niyant: Thank you, Trae. Thank you, Ryan.
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