Enter new markets and embrace a distributed workforce to grow during a pandemic

Many companies will not see the uncertainty of a global pandemic as the perfect moment to go international, but for others (particularly in healthcare, online communications, and workplace mobility) the market is stronger than ever and companies are having to respond quickly internationally to both service existing clients and take advantage of the growth in demand.

We and our team at Taylor Wessing advise 50 to 75 venture-backed North American companies each year on setting up in Europe or Asia. We’ve helped companies such as TaskRabbit, Lime, Glossier, InVision and many others translate their domestic success to new jurisdictions and cultures and to thrive as global businesses.

This is a practical guide to international expansion with the challenges of the current time in mind. It’s a quick-read providing some practical tips and sharing best practices from peer companies to help you come out of the pandemic with a strong international presence. A great deal of this advice is evergreen and will serve you well whatever the circumstances may be.

In particular, we’ll cover the rise (and risks) of distributed workforces — a way for CEOs to hire the best talent anywhere in the world. This has taken on new significance with the boom in remote working as one of several options for CEOs looking for strategic growth during and after COVID.

Is this the right time to expand overseas?

Ten years ago, the timing question was much simpler. Founders would first of all focus on developing a product and winning over their domestic market, funded through their Series A and B rounds, and then go on to raise their Series C round, which investors would expect to be used to push into new markets.

Since then, with the age of the smartphone in full swing and international direct ordering ubiquitous, opportunities to sell into new markets appeared far earlier in a company’s growth and there is no longer a canned strategy for timing your international expansion.

The current circumstances have exaggerated this trend. There are many challenges in traditional sectors, but also many new market opportunities quickly appearing in healthcare and other technology sectors with founders wanting to move quickly into new markets.

Although it may be tempting to just get a few sales people on the ground to go for it, we would still recommend laying some groundwork and making some key decisions before diving in. For example: ensuring management can give sufficient time and attention to the new market; tweaking your product to comply with local regulations; reworking your sales approach.

If you are early-stage, tread carefully. Our belief is that the Series B round is still the earliest a founder or board should consider international expansion. The companies we’ve worked with who have moved earlier than the B round will generally end up realizing it’s too early. They’ll end up pressing pause, or making a full strategic exit, tail between legs.

International expansion is a matter of focus, as well as financial resources. Once you’re selling into a new market, everyone in the business needs to be thinking internationally, including the CEO, CFO, general counsel, the board, engineers and staff. It can stretch everyone before there are the necessary resources in place to cope.

Decision made: How do you get going quickly?

Even in the best of times our advice would be to not experiment or push the boundaries when it comes to your international strategy, do that elsewhere in your business. You should follow the path most travelled at this stage. This is especially true in the current climate. If you’re thinking of doing something new, something your peers haven’t done before, we should have a conversation first.

Whichever market you’ve chosen, there are some universal first steps (although they might vary slightly between jurisdictions). For example:

• If you have a permanent establishment for tax purposes (i.e., the local tax authorities consider you established enough to be paying income tax and corporation tax), work on the basis that you’ll need to incorporate a company or register a local branch.
• Consider flexible options when it comes to taking on people (more on this below). Remember that in all cases local employment contracts will be needed (subject to the use of PEOs – see below).
• Perhaps most importantly, local agreements transferring IP ownership will be needed (see next chapter).
• There will also be some local filings (e.g., tax, corporate, payroll) where you will need a local service provider such as an accountant and payroll provider.

Common international expansion traps … and how to avoid them

Look before you leap: Even with a runaway opportunity, adapting your product, pricing and pitch to the local market is crucial. For the sales team, the pitch that gets customers in California, New York or Texas probably won’t work in Hamburg or Barcelona.

Brits and Europeans will, for example, give an unsolicited sales call a frosty reception at best (and a few choice words at worst!). They respond better to a less intrusive, more relationship-driven approach.

Because of these cultural differences, a successful international sales strategy will usually require you to hire native salespeople who will understand the local market and have a local network already in place.

Hiring and firing: Outside of North America, employment-at-will (i.e., not having to provide a “just cause” for termination) is rare. For example, full employment rights in the U.K. kick in after an employee has been with the company for two years, so you should always have an 18-month review.

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In most European countries you must work on the basis to take advice before ending a relationship — and budget assuming that you’ll have to pay something. Because of that, it always makes sense to set yourself up for success and use employment contracts that put you in the strongest position when it comes to dealing with employees.

Stock options: Even though you will grant out of the parent company stock option plan, you’ll need to consider local tax and securities laws on a country-by-country basis.

There will also be significant differences in how employees value options in different jurisdictions. For example, if you’re hiring an engineer or a sales person in the U.K., you’ll need to grant stock options to get the top talent. For the same person in Germany, a cash bonus or a company car may be viewed as a better package.

Trademarks and IP: Always control your own IP, and make sure it’s in your name. Don’t let third parties (e.g., employees, distributors, resellers) register local rights. For example, Pinterest famously spent a number of years trying to wrestle back the name from a European trademark squatter. Register early (or now).

Immigration: Historically this has been a focal point and whether to seed international locations with a parent company employee a key decision. In the pandemic, international relocation of employees, while possible, does not follow the same rules as it has in the past. It can be done, but consult an immigration professional first, and don’t underestimate issues such as extended visa processing times and cost involved in the move.

Flexible approaches to staffing internationally in uncertain times

The pandemic has led to more and more people working remotely (by choice or necessity), resulting in companies having to manage an increasingly distributed workforce. It has also led to companies evaluating their longer-term strategy to hiring.

While some leadership teams have historically always embraced the “hiring the best in the world wherever they are” mantra, frankly, while being able to hire talent anywhere in the world is a fantastic opportunity, it can come with big HR headaches — employment law regimes, benefits and payroll providers, and tax implications vary significantly across different countries. With this approach even more in the forefront as a result of the pandemic “Zoom Boom” there are some strategic considerations to bear in mind.

Some of the pros and cons of the following options for bringing on teams globally are set out below.

The rise of the PEO

In the last couple of years, professional employer organizations (PEOs) have rapidly become a go-to method for U.S. companies looking to expand internationally (and quickly). They have always been a feature in the U.S. due to the popularity of co-employment arrangements, but particularly in the last few years we’ve seen their use grow in the U.K. and Europe.

There are clear business advantages to the use of the PEO. They can be established quickly with limited administrative burden on the company as the PEO will provide the employment documentation. Payroll is also dealt with by the PEO and they also deal with ongoing employment issues. It can also save setting up a corporate entity in the short term, which has a cost and time savings (at the beginning when you need to move quickly).

That said, our understanding of why PEOs work well in the U.S. is that the concept of co-employment means that companies still have a direct relationship with the employee. It is a way to move quickly and hire relatively painlessly in multiple jurisdictions.

In Europe and beyond that won’t be the case, so the PEO is the employer. That leads to several challenges:

• Stock options: The person is not your employee, so you may need to cancel and regrant options or pay employee taxes if they do later become employees. You should consider holding off granting stock options until they are your direct employees.
• Trademarks and IP: IP and other rights vest in the employer, which in this scenario is the PEO and not you. You need to ensure it’s clear in your agreement with the PEO that any IP created by your employees (working under the PEO) does belong to you. This is particularly key if these employees are engineers, or if you’re doing R&D on the ground.
• Noncompetes: If you use a PEO, you won’t be able to enforce a noncompete or other restrictive covenant against your employees if they were to leave and work for a competitor, because you don’t have a direct contractual relationship.
• Transference: Finally, when the person does become your employee, it will likely be a transfer, which in some jurisdictions needs consultation and can mean it becomes difficult to change employment terms. In the U.K., this would be a TUPE transfer — something people will be familiar with if you’re acquiring businesses or assets, but can catch people out in a PEO scenario where you effectively have a transfer of the business from the PEO to you.

As well as the co-employment risks, PEOs also have a potential permanent establishment risk. Leading accountants often advise that the tax authorities could look through the structure and view the team as company employees, and if that happens then the right international tax planning will not have been done. It is difficult to assess this risk in practice, but different factors will have companies on varying parts of a spectrum.

So, to sum up, PEOs can be a very useful (but expensive!) short-term fix to move quickly internationally and bring on a team in multiple jurisdictions. However, they should be seen as temporary solutions (6-12 months max.) and companies should be alive to the risks of signing up to them.

Contractor/consultant route

Interestingly, in our experience, there’s no huge difference between what makes someone an employee or a consultant, no matter what jurisdiction you choose, but the consequences of that decision can vary hugely depending on location.

For example, some jurisdictions can levy fines and make requests for large tax payments (of sums that should have been deducted from your “employee”). There will also likely be issues in the event of a contentious termination of the relationship and it can be much harder to justify noncompetes.

What we do find, universally, is that it’s almost always better to bite the bullet and be honest about the status of your people. There is an acceptable de minimis in our experience (for example, using a consultant for a period of less than six months tends to be relatively low risk) and some advantages with the speed you can bring contractors on board, but you should work on the basis of getting it right.

Jumping straight to direct employees

While PEOs are becoming more common, we still do see many companies hire directly. With this approach, there’s no issue with control or enforceability of restrictions from a third-party employment perspective, no liability for failure of third-party employer obligations, and greater control over employee disputes and litigation (should that arise).

Some do this in the early stages by hiring directly from their U.S. entity and simply providing the employee with a local employment contract. Each EU country has its own mandatory local labor law (and, crucially, employment-at-will does not exist in the same way in Europe) that will always apply even when the employee is employed by an overseas company. The key flag here is to be aware of whether you’re inadvertently creating a permanent establishment in that country — our advice is to speak to your tax advisers if this is the route you want to take.

Alternatively, you can “bite the bullet” and set up a local subsidiary in which to employ local employees. There is then no permanent establishment risk providing you have appropriate intragroup agreements in place. You can also control the structure of your subsidiary entities.

Many companies use a “cost plus” as well as a “hub and spoke” model for hiring, meaning they will have main country hubs with a local entity, and for those countries where there is just one or two employees working remotely employees can be hired under the hub country with a local employment contract. This remains the most common (and safest) long-term solution.

Best practices on distributed/remote workforces (specifically in light of COVID-19)

The pandemic has thrust the option of working from Barbados or Barcelona into the fore. But there are some traps for the unwary in allowing too much flexibility:

• Beware tax and social security implications. In particular, you should track the number of days any employee is working in a foreign country closely. You may want to consider a secondment agreement to avoid the applicability of a foreign social security system. There could also be an impact on stock option planning and it is important to consider a country-by-country approach.
• What immigration and visa issues could be triggered? With the end of the transition period for Brexit ending on December 31 2020, new rules within Europe will apply.

Practical steps to take are:

• Consider implementing a remote working policy for standard requests (e.g., working from home) or implement a best practice procedure.
• Check local special provisions on entitlements for working remotely (e.g., health and safety, financial responsibility of employer).
• Consider an addendum to the employment agreement (e.g., is there a defined work place, a right to withdraw the working remotely entitlement).
• Define a team which handles requests to work remotely and knows how to deal with them.
• Check any GDPR/confidentiality requirements.
  

You can use our International Expansion Guide for a high-level overview of the legal and regulatory considerations in popular jurisdictions. You can also use the guide to directly compare rules in different jurisdictions.

We sincerely hope this guide gives founders and C-suite executives some food for thought in forming a plan for their international growth (and a pause for thought on those considering too intrepid an approach).

If you would like to carry this conversation on, please don’t hesitate to get in touch.

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