Launching Operations in Silicon Valley Eh?: Checklist of Legal Things You Need to Consider

May 21, 2014 Kevin K. Rooney

More Canadian start-ups are spending time in Silicon Valley, whether to establish partnerships, seek investment, recruit talent or engage with customers. For good reason, since many of the world’s largest technology companies are here, and yes there is a boatload of cash with the venture capital firms located here (investments in Silicon Valley represent more than a third of venture capital investments in the U.S.). Canadian start-ups are supported in such initiatives by the C100, the Canadian Trade Commissioner Service and their Canadian Technology Accelerators and the large base of Canadians present in the valley.

If you are considering formalizing a presence for your Canadian company in the valley, below is a checklist of certain legal stuff you need to consider.

Immigration matters

If you or any of your Canadian team members plan to spend time working in the U.S., you need to understand at the outset what temporary visas are available to work in the U.S. and what pathways exist from there for permanent resident status if that is desired. The options available may impact the structure of any parent or subsidiary company in the U.S. and your ownership and employment relationship. Therefore, you should START any discussion of a physical presence in the U.S. with a meeting with an immigration attorney to understand the options and applicable processing times.

“Flip” or form a subsidiary?

Given Canadian tax reform and Canadian tax incentives for CCPCs, most established Canadian start-ups are not “flipping” to Delaware as often as other non-U.S. start-ups as part of their decision to establish a presence in the U.S. The prevalence of strong Canadian start-ups and the efforts of the supporters of such companies noted above has resulted in a large number of U.S. venture capital firms with experience funding Canadian companies directly. As a result, keeping your Canadian company intact and forming a Delaware subsidiary is the typical course of action for local operations. Use of a subsidiary provides for a number advantages, including a U.S. corporation for entering into agreements in the U.S. with partners, customers and others, isolation of operations and limited liability, hiring employees and providing employee benefits and allowing IP ownership and corporate tax planning.

Hiring employees in the U.S.

Employees hired in the U.S. are typically “at-will” meaning that employment may be terminated at any time by the employer or employee for any reason or no reason. For start-ups, employee offer letters are used covering title and reporting structure, salary, entitlement to benefits, start date and administrative matters. With rare exception, employees do not receive severance terms or any stated perquisites. Your U.S. subsidiary would be the employer of your U.S.-based employees, subject to any immigration structuring for you or any of your Canadian team members as noted above.

Typically, standard-form employment documents for the company are provided by counsel and the company tailors as appropriate and processes employee hires without counsel. There are minimum wage laws, employee classification requirements and otherwise a vast set of applicable employee labor regulations, some of which become applicable based on the number of employees, so U.S. employment counsel should be involved to provide the required employee documents, register the company with the California Employment Development Department, assist with on-going compliance and termination of any employees.

Granting equity to employees in the U.S.

Your U.S. employees will receive options or other equity grants from the Canadian parent company equity incentive plan established for employees. There are certain requirements for such plans in the U.S. for beneficial tax treatment and federal and state securities law compliance. As a result, your existing equity incentive plan should be reviewed by U.S. benefits and tax counsel to ensure compliant or if any amendment, subplan or form of U.S. grant agreement is required. In addition, counsel will prepare and file in advance the required securities notice form covering the plan securities with the California Department of Corporations.

IP ownership

Consideration should be given for where the IP of the company group resides to ensure the entity selling or offering the company’s product or service has the legal rights to do so, or as part of any IP enforcement planning. Typically, the U.S. employee documents will provide for ownership of all work product by the U.S. subsidiary. Intercompany agreements can be entered into as needed to move the ownership of or license certain or all work product and associated IP rights.

Tax planning

Canada has favorable corporate tax rates that are lower than the U.S. As a result, you should consult with your tax accountants and U.S. tax counsel regarding your operations in the U.S. and the tax effects. There may be opportunities to avoid a permanent establishment for the Canadian company in the U.S. resulting in all company income being taxable in the U.S. or otherwise structure the companies, IP ownership as noted above and operations in a manner to minimize taxable income the U.S. That said, optimizing for taxes and the associated time, effort and expense in both planning and administering may not be the best use of your time and funding and should be carefully considered at the outset.

Kevin K. Rooney is a C100 Charter Member and a Partner at Cooley LLP, a leading law firm representing growth companies with more than 750 lawyers across 11 offices in the United States and China. Mr. Rooney has been in the valley since 2000 representing technology companies at all stages of growth and investors in such companies. He holds a BASc in Mechanical Engineering from Waterloo University and a LLB from Dalhousie University.





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