Saas · Entrepreneurship

SAAS start-up business structure, what's the best way to establish for investment and sell ?

Patti Polk,

January 20th, 2016

Need examples and advice on what works best for a SAAS based company with 3-4 co-founders looking to serve both US and EU markets, raise capital and hopefully be acquiredat some point.

Current suggestions seems a bit off, see what you think and please give best alternatives.

Company A would own IP and house developers, then separate LLC or companies would run the sales and marketing for regions like Europe and NA. Company A would own 40 % of each zone company and each company would pay 40% of revenue back to company A. The product is a communication platform, with SMS pass through.
Looking for examples and thoughts on how to best structure this business for equity for co-founder and investment and acquisition.
All input appreciated!

Benjamin Olding Co-founder, Board Member at Jana

January 20th, 2016

This seems unnecessarily complicated, which I think will attract a lot of extra scrutiny at every financial round (investment and acquisition).

I don't know this, but I'm guessing this structure is meant to achieve "value creation through obfuscation." While this may help you attract talent who can't possibly decode what their equity is worth, I think it will be a constant headwind for investment and acquisition.

Is there some tax cleverness you are trying to achieve here?  Why not have one company own 100% of all other companies and have the individual ownership only in the parent company?  It would be more common, at least amongst multi-country tech startups.  

This proposed structure for a company that does not exist yet feels like a premature optimization.  Sophisticated investors are going to notice you probably just messed up your COGS  reporting something fierce by slicing off revenue for the parent company and leaving behind whatever unsustainable incentive structure at least one of those sub-companies is going to quickly invent for themselves in order to make their bonuses.  

While it may not preclude investment or acquisition, it's going to slow due diligence down a bunch.  In my experience, you should not underestimate the value of speed when it comes to financial events - time is generally the enemy.

The silver lining to your structure is, when you finally realize this, the parent company can just kill all the marketing & sales organization with one piece of paper and create new wholly-owned subsidiaries the next day.  

If you do go down this type of path, make sure the IP doesn't get licensed to the sales orgs and make sure all your shares are in the parent company...  You don't want to be holding the bag as the owner of a sales org that has tax obligations and no product to sell.

My advice though would be to start dead simple (1 company in the market where you are targeting investment and each cofounder/owner outside that market operating as an independent contractor).  Slowly build out your legal org in other countries only as it financially makes sense to do so.  Every time you file  legal paperwork, you create government obligations for yourselves: make sure you already have the resources to meet them (meaning you can pay good lawyers and accountants to deal with it for you).

The exception to the independent contractor approach would be if one of your co-founders needed a work visa...  but in that case you should question if they are the right cofounder for that market.

Adrian Garcia Founding Partner at Carao Ventures

January 20th, 2016

An easier initial construct could be (we have used it in a couple of companies) is having a US Delaware C-Corp as parent entity, that owns the IP, and 100% owned subsidiaries that sell the product in each market. Each of these subsidiaries pays for the use of the IP/Software back to the parent company (ideally with specific and right transfer pricing terms). In addition you could have cost centers that could be the finance/admin or development that are in other countries that bill services (arms length transactions) to the parent company. I hope it helps.

Anonymous

January 20th, 2016

US Delaware C Corp and register the company as a foreign corp in California.
Look and feel and operate like a SV startup with hyper growth potential.
Use Foley / WSG or someone like that put together all the corp docs.
Use Zenefits for HR and Payroll
Use FirstRepublic for Banking
Get a well known CPA firm to handle the accounting structure
As founders, you will make a lot more from getting acquired than you will from running the operation. 
Establish funding sources early so you dont run out of gas mid air.
1. Build a product that works and users love it
2. Spend a lot on marketing and customer acquisition 
3. You need to show traction, retention and engagement of your users
4. Destroy the competition by taking market share
5. You will get acquired
6. Start Over with next project after a short break
7. Invite us to the after party

Bettina Bennett

January 20th, 2016

Patti,

I'm with Benjamin!
Keep it simple.
We're a SaaS company, with HQ in the US, because this was/is our initial target market. Since I am originally from Germany, we're now also beginning to explore branching out into the European market. 
Still: ONE company, doing business in (hopefully soon) a whole lot of places around the world.
IF the need arises, we can always add additional subsidiary or other entities.

Steve Bowman Owner, BizClarity and Venture Capital & Private Equity Consultant

January 20th, 2016

Investors are easily spooked if the structure looks too complicated. Not that they can't understand it, just that they know from experience that complexity breeds unforeseen problems and questions about who controls what. Keep it simple. 

Martin Omansky Independent Venture Capital & Private Equity Professional

January 20th, 2016

I conduct due diligence for several angel investment groups. Used to be a venture fund manager. My initial reaction is that the business model is DOA. Call me for details. Sent from my iPhone

Bruce Fryer Lean Startup Product Management / Strategy / Marketing with a Flair for Innovation

January 20th, 2016

US Delaware C-Corp.  The end. 

I worked at Novell and divested a company who had a setup like you described.  It was a royal pain in the butt and took me 1 1/2 years to sort it out to the buyers satisfaction.

Martin Omansky Independent Venture Capital & Private Equity Professional

January 21st, 2016

Form follows function. Investors like us want simplicity.  We don't want to unravel complicated business arrangements.  

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

April 19th, 2016

You want to keep it simple.  Set up a US S-corporation or C-corporation in the home state of the investors or Delaware/Nevada if there isn't an obvious home state.  As the company grows, you can make things more complicated.

If there are US persons involved, then you have to do overseas companies very, very carefully.  There are a dozen landmines that could cause massive tax consequences, and your legal and accounting fees can go through the roof.

The other problem is that if you keep it simple, then once you grow it will be easier to unwind the structure and then change it.  If you start out with a complicated structure than you may find it very hard to change later.  The other thing is that if you just set up a simple company, then its easy to find legal/accounting help.  If you do something weird, then the people that can work with that structure will be highly expensive.