Doing Business in Greater Phoenix, U.S.A. - Chapter 5: How to Start & Grow A Company in Greater Phoenix

5.1: HOW TO SET UP A NEW BUSINESS 5.2: HOW TO ACCESS CAPITAL 5.3: HOW TO FORM STRATEGIC PARTNERSHIPS 5.4: HOW TO FIND QUALIFIED EMPLOYEES

5. 1: HOW TO SET UP A NEW BUSINESS

Choose a Business Entity

The U.S. has no federal company law and the rules regarding the formation, operation and dissolution of business entities since they are defined by the state where the business entity is formed. You have your choice of several different types of business entities that you may establish.

Corporation: A corporation is managed by a board of directors and owned by shareholders. The corporation is a separate legal outfit from its directors and shareholders, who generally may not be held liable for the debts and obligations of the corporation – if corporate formalities are observed. To achieve and maintain limited liability, a corporation should be adequately capitalized. However, the non-U.S. parent of the company may not be immune from product liability claims in the U.S.

A corporation must have officers as well as directors, but the roles may overlap. In general, a president, chief financial officer and secretary must be appointed by each corporation. There are no nationality requirements imposed on management.

A corporation and its shareholders are generally subject to double taxation, at both corporate and shareholder levels, but certain corporations may make an “S” corporation election, which results in the corporation being treated similar to a partnership in that the corporation’s taxable profits and losses are passed on to shareholders. However, note that an “S” corporation may not be owned by non-U.S. persons.

Limited Liability Company: A limited liability company, or “LLC,” is a hybrid between a corporation and a partnership, in that its owners benefit from limited liability (i.e., the owners are not liable for the debts and obligations of the LLC). Unless it elects otherwise, an LLC is treated like a partnership for tax purposes and combines certain advantages of both entities. An LLC is managed by its managers and owned by its members, each of whom has limited liability. However, an LLC may elect to be taxed as a “flow through” or a corporation. In contrast to most corporations, all financial benefits accruing to shareholders need not do so in direct proportion to the share ownership. Instead, the LLC’s operating agreement may describe how profits, losses and distributions will be allocated, which may differ from strict ownership percentages.

General Partnership: A general partnership is owned and managed by its partners – who are personally liable for the debts of the partnership – and is “flow through” for income tax purposes.

Limited Partnership: A limited partnership is managed by certain partners – called general partners – and owned by all of the partners. The partners who do not participate in the control and management of the partnership are called limited partners, and their liability is limited to the amount of their investment in the partnership. Unless it elects otherwise, a limited partnership is “flowthrough” for tax purposes.

Limited Liability Partnership: In most states, a general partnership and a limited partnership may elect to be limited liability partnerships, or “LLPs” or “LLLPs.” An LLP essentially provides the same liability protection for its owners as an LLC. An LLP allows each partner to actively participate in management affairs. Unless it elects otherwise, an LLP is “flow-through” for tax purposes. Joint Ventures: “Joint venture” is a general term used to indicate a relationship between parties participating in a common enterprise.

It describes an arrangement in which two or more parties decide to form a new business together or contribute portions of an existing business or other assets to a joint enterprise; the term does not describe a form of legal entity. Joint ventures can be formed using a corporation, LLC, LP or general partnership. Issues to consider when forming a joint venture include the scope of the venture, required capital contributions (both initially and at later intervals), respective responsibilities of the entities involved, sharing of profits and losses, decision-making and the breaking of deadlocks, and mechanisms for dissolution and distribution of assets. However, direct participation in a joint venture or “cooperation” agreement may expose any non-U.S. owner to liability for the venture’s obligations and liabilities.

“Branch” Only: A foreign business’s first steps into the U.S. market are often through sales, distribution or licensing arrangements. Some businesses choose to commence U.S.-based operations by opening a U.S. branch that is simply an extension of the non-U.S. company’s headquarters. A U.S. branch may be easily established; a non-U.S. company simply registers as a foreign corporation in the state or states where the business will be conducted, which typically involves filing a form and paying a modest fee. However, a significant disadvantage of establishing a U.S. branch is that the non-U.S. parent company may be exposed to all of the liabilities of the U.S. branch, including the possibility of a full audit by the U.S. Internal Revenue Service. Using a U.S. branch office potentially permits U.S. start-up losses to be applied against the home office’s income. However, U.S. tax laws generally impose a tax on U.S. branch profits in a similar manner to how a corporate subsidiary is taxed; distributions of profits from the branch to its home office are also taxed as dividend distributions.

Business Name

Before you form your business entity, you should confirm the availability of the proposed business name. This is done at the state level, but you should note that the availability of a name does not mean that it is not infringing the intellectual property rights of third parties. An organization may conduct business using a name other than its registered name, provided that such “fictitious” name or trade name is registered with the applicable secretary of state or in the county where its principal place of business is located and in which business is carried out under that name.

Tax Elections

At the time your business entity is formed with the state government, your newly formed entity must also obtain a federal employer identification number (EIN) from the U.S. Internal Revenue Service. This EIN number will be used in all tax-related filings, including filings on the state and local level.

Governance

As a separate matter from the state and tax filings to establish the entity itself, a business will want to establish clear procedures regarding how the entity will be governed and operated. In a corporation, these internal rules are generally set forth in its bylaws and with a shareholders agreement. In a limited liability company, the owners are generally in an Operating Agreement. Partnerships have Partnership Agreements and joint ventures usually have a Joint Venture Agreement. These documents also set forth procedures for meetings; voting; internal financial, accounting and record-keeping matters; notice requirements; and provisions regarding the dissolution, winding up and liquidation of the entity.

An organization should take into account the level of control that its foreign parent company/affiliate will exercise in contrast to how much authority and operational control is exercised locally. Foreign parents of U.S. entities should use care in structuring relationships with their U.S. subsidiary entities to avoid potential “piercing of the corporate veil” by courts in litigation: In certain circumstances where the parent entity so controls the U.S. entity’s operations, there may be some risk that a court here could consider the foreign parent to be the “alter ego” of the subsidiary and expose the parent company to liability for claims made against the U.S. entity.

5. 2: HOW TO ACCESS CAPITAL

When expanding to Greater Phoenix, you’ll want to establish a banking relationship with an Arizona bank that has international banking capabilities, especially those with service related to multi-currency loans and deposits, international treasure management and account balance reporting. When access capital, here are three different ways to help grow your company:

How to Utilize Angel Investment

An angel investor is an individual who provides capital for a business startup usually in exchange for ownership equity. A small number of angel investors form angel networks to share research and pool their investment capital. Foreign startup companies and early-stage growth ventures that are looking to enter the U.S. market through Arizona should use the following simple check list:

  • First, determine where your business is in the seven lifecycle stages of a startup or early-stage company:
  1. Research
  2. Ideation / Prototyping
  3. Validation
  4. Commercialization
  5. Scale / Growth
  6. Sustainability
  7. Exit
  • Next, align your company’s lifecycle stage with your goals for U.S. market entry. Do you want to:
    • Determine the size of market available to your innovation in the U.S. market?
    • Understand the competitive head winds in the U.S. market for your innovation?
    • Identify a clearer understanding of how your product or service or solution will be used in the U.S. market by American consumers?
    • Access capital in the U.S. in order to go to market?
    • Tap into U.S. talent (management, workforce, etc.) to help your company enter the U.S. market?
  • Then, align your lifecycle stage and goals with the resources available in the market:
    • Research, Ideation & Prototyping stage:
      • Work with the Arizona Commerce Authority; Arizona State University’s Venture Catalyst program; nonprofit Incubators like SeedSpot or CEI (Center of Entrepreneurial Innovation); or nonprofit co-work space providers like Co+Hoots.
      • Any of these resources can provide basic services, such as work space, mentoring and other free services to help you further shape your idea or concept before validating it and/or forming a business around it.
    • Validation stage:
      • Work with nonprofit accelerators like Mac6 or Gangplank; or for profit Commercializors like: Tallwave.
      • Groups like these can provide free, fee-based or equity-based concept- and business-validation services for entrepreneurs who need such validation in order to move into the market and begin securing seed funding.
    • Commercialization, Growth (Scale), Sustainability and Exit stages:
      • Work with for-profit commercializors like Tallwave; or venture capital firms like the Angel Capital Association, Canal Partners, Grayhawk, Diamond Ventures, etc.
      • Groups like these provide either venture capital or a combination of services and capital to help Arizona entrepreneurs successfully fund their seed, iterative and, sometimes, reiterative rounds

The Arizona-based startup Tallwave, founded in 2010, became the nation’s first “commercializor” for startups and early-stage growth ventures, including global companies that showed interest in exploring market opportunity in the U.S. Tallwave is the only known commercializor in the country of all the resources above. Unique among incubators, accelerators and venture capital firms, Tallwave provides all the services and capital resources that each of these groups provides separately, but under one roof.

Global entrepreneurs can find Arizona an appealing place to commercialize their ventures for scale and sustainability, and to maximize the value they’re building. Foreign investors work with firms like GPEC and Tallwave to get connected to entrepreneurs and to minimize their investment risk.

How to Engage a Venture Capital Firm or Investor

Venture capital (“VC”) is best suited for early-stage companies in the technology space. Venture capitalists consistently seek opportunities to generate eight-to-ten times their investment from companies in which they invest. Technology companies usually provide such potential and do not qualify for traditional bank debt. Often times, these companies are funded by friends, family and personal capital to launch the business.

One of the most important considerations in seeking venture capital is synergy with your company. There are many VC funds in the market, but each venture capitalist will have different philosophies and investment parameters.

Understanding the capacity of the VC and its industry focus saves a lot of unnecessary effort. Seek out only those VCs that are within your industry vertical and that fit your capital needs; for example, an established VC is likely less interested in a $3 million round than a $15 million round.

A VC partner will see about 250 business plans per year and invest in one or two. As such, the best way to contact a VC is through a personal introduction. Unsolicited emails are often times dismissed. When submitting a summary of the investment opportunity, it is important to cover the following components:

  • Value proposition: Problem that is solved by your product/service
  • Defensibility: Barriers to entry, intellectual property
  • Business model: Unit economics or ability to make money
  • Market size: Should be $1 billion in annual revenue in the next 4-5 years
  • Management: Experience and cohesiveness
  • Business plan: Go-to-market strategy and financial projections

The VC will conduct due diligence on your company after you submit a summary or do a presentation. Likewise, you should conduct your own due diligence on the VC. You should understand their domain expertise, their resources and the value they bring to the table. With the right fit, the VC partner can help create significant value at the end of your journey.

How to Prepare an Initial Public Offering (IPO)

One method for a seasoned company to gain access to additional and robust capital is to engage in an initial public offering (“IPO”). For many emerging companies, an IPO is the preferred exit strategy for early-stage investors and founders to ultimately realize the return on their initial investment by selling all or part of their ownership into the public capital markets in the United States. For the most part, IPOs are limited to those companies that have a proven track record of healthy financial condition and results of operations. Following an IPO, the reporting company’s stock (equity) is considered “registered” under the rules and regulations of the United States Securities and Exchange Commission (“SEC”) and trades freely in the public market (often on a national securities exchange such as the NYSE or NASDAQ).

Preparing for an IPO involves a thorough assessment of whether or not a company is prepared to operate as a public company subject to SEC reporting. The IPO process and the resulting compliance requirements involve substantial up-front and ongoing time and costs. Prior to the IPO process, the company must assemble a working group that includes the management team, the board of directors, legal counsel, auditors, a registrar and transfer agent and, in most instances, an investment bank. All such advisors and consultants should be carefully evaluated in advance to determine if they have substantial experience with the IPO process – since their role in underwriting the IPO is critical to its ultimate success. This working group must evaluate such key issues as the appropriate market in which to launch, the size of the market, the regulatory requirements of both the SEC and relevant securities exchange, whether regulations will require any structural changes to the company, the likelihood of success, any scaled disclosure requirements available to emerging growth companies and the impact of an IPO on existing shareholders.

IPOs require extensive cooperating and coordination among members of the working group to complete its public disclosure documents, which will generally include a long-form registration statement prescribed by (and to be filed with) the SEC (e.g., a Form S-1 and Prospectus), with a registration statement including audited financial statements. The IPO process will also involve: Various agreements between the company, the underwriters, the registrar and transfer agent and the shareholders; various internal documents, such as charter amendments, board and shareholder consents, lock-up agreements and certificates of legal opinions; and intensive legal and financial due diligence, including preparation of various opinions from legal counsel and the auditors. Once the IPO is completed, the company will be a reporting entity that has ongoing periodic filing obligations and substantial compliance requirements related to, among other things, SEC (and possibly other securities exchange) rules and regulations.

5.3: HOW TO FORM STRATEGIC PARTNERSHIPS

Partnerships with Universities

Partnerships with universities are usually established through university economic development offices. For example, Arizona State University’s industry engagement efforts are housed within SkySong – the university’s innovation center located in the city of Scottsdale. These offices have a team of experts that connect companies to various resources within the university and guide companies through the partnership establishment process.

Public institutions, like Arizona State University, the University of Arizona, and the Maricopa Community Colleges, are subject to federal and state laws that govern certain types of relationships. For example, vendor relationships are subject to state procurement laws.

The region’s research institutions often partner with companies to develop or license intellectual property. The partnership could entail working on a basic research problem, commercializing a technology, or licensing existing university technologies.

  • Industry-sponsored research partnerships, where more than one project is likely to be undertaken, are governed by “master research agreements.” These agreements govern all research activities supported the sponsor without the necessity of renegotiating important term and conditions for each new project or task, including: publication, confidentiality, intellectual property, indemnification, publicity, rights and procedures to terminate the project; and insurance, warranties, liability, governing law, and other items necessary for contracts. Once a master research agreement is fully executed, all project-specific information is combined into an addendum often called a “project specification” or “task order.” The addendum is attached to the master research agreement and frequently contains the following specific items: scope of work to be conducted, budget, compensation; schedules, milestones, and deliverables; co-funding information (if any), and background intellectual property (if any).
  • In order to develop a technology for commercialization using university intellectual property, a license agreement, negotiated on a case-by-case basis, is used. Each negotiated agreements includes the following elements:
    • License fees – fee depends on the market value of technologies
    • Equity – institutions will likely expect to receive equity in start-up companies based on their technology
    • Patent reimbursement – fee reflects the cost incurred to patent technology
    • Development period – plans that outline development milestones are required; projects with long development horizons use development plans to reduce license fees on high-risk projects since milestones payments are contingent on development progress
    • Royalties – fees paid when products or services utilizing technology are sold; a minimum royalty is also likely

Establish Distribution Partners

Depending on your industry, there are a number of ways to “go to market” in the United States. For example, producers of fastmoving consumer goods will likely need to go to a large retailer such as Walmart or Target in order to gain significant market share and shelf space. For those two and similar retailers, as well as for major grocery chains, you should have a well thought out promotion plan, and be able to assure them of reliable, timely supply at a competitive price.

On the other hand, if your target market is major businesses such as Boeing, Honeywell or even Intel, you should understand that significant parts of their supply chain may be in the hands of distributors. In that case, it will be necessary to work with both the distributor and the ultimate customer to make certain the items you will supply will meet specifications and can be priced competitively. Many distributors carry entire lines of items, and it may be important for your offerings to fit in with the various items the distributors already have. Incidentally, companies such as Honeywell, in some cases, will look to resell items to its extensive customer base because there are clear advantages to that arrangement.

If you’re in the health care industry, distributors such as Cardinal, McKesson and Owens & Minor control major parts of that market. Similarly, companies wishing to address the food business – whether that is food service or grocery stores – are advised to think about food brokers and dedicated distributors as gateways to these markets. Contracts with appropriate terms and pricing, as well as promotional support, are critical to appeal to these firms.

Arizona has a long-established capability for handling goods to and from Mexico, especially fresh produce. There are large warehouses and exchanges – as well as very reputable customs brokers and freight forwarders – that specialize in moving goods and selling to both the Mexico and U.S. markets.

Greater Phoenix also has a number of large purchasing organizations based in the region: In particular, Avnet, the world’s leading electronics distributor, has its headquarters in Phoenix, as does mining giant Freeport–McMoRan. Also noteworthy are Intel, Honeywell, and Henkel USA, which all make purchasing decisions through groups located in this region.

Incubators/Accelerators

When a startup or early-stage company is formed, it is often in need of leadership, strategic introductions, networking opportunities, access to capital and basic support services. Many of these needs, understandably, take a backseat to the actual efforts to make the business a viable, revenue-generating operation. Incubators and accelerators often seek to assist an emerging company with some of these needs during this critical, early-stage time period.

Incubators often provide access to an external leadership team; incubators can take many forms and may be for-profit or nonprofit, private or public. An accelerator typically seeks to find and select early-stage companies it believes it can assist by providing them training, strategic leadership and mentorship through targeted programs or competitions. Venture capitalist investors frequently provide these programs as they try to learn more about the founders of an early-stage business, their business model and the company’s potential. The most effective incubators and accelerators focus on a particular industry or niche market. Some incubators and accelerators charge a fee for their services, while most seek ownership in the early-stage company in exchange for the assistance they provide. The amount of equity that an incubator or accelerator might expect depends on a number of factors, including the stage of the company and the nature of the assistance being provided. Emerging companies should perform their own due diligence on a particular incubator or accelerator before they agree to involve the incubator or accelerator in their business plans and before they leverage equity in exchange for assistance.

Prior to using a particular incubator or accelerator, review the history of the place you’re considering and its past success in these areas:

  • Particular industry to which it caters/promotes
  • Capital raises for its clients
  • Reaching desired exit goals for its clients (e.g., IPOs, sale of business, etc.)
  • Assembling effective boards and management teams for its clients
  • Some business incubators in Greater Phoenix include AZ TechCelerator in Surprise, ASU’s SkySong in Scottsdale, Innovations in Chandler, AZ Disruptors in Scottsdale Airpark and the West Mesa Business Incubator

Partnerships and Joint Ventures

When looking to form a strategic partnership, the term “joint venture” is often used as a possible structure. Joint venture is more of a general term which describes two or more entities collaborating for a single purpose and does not necessarily denote a specific legal structure. Joint ventures are especially attractive to companies that wish to break into foreign markets that require affiliation with an existing local partner. Unlike in a merger or acquisition setting, the entities managing a joint venture continue to operate their own companies separately and form, or choose, a separate structure in which to operate their joint venture.

For instance, a joint venture may be established by two entities choosing to form a new entity (such as a limited liability company) that will be owned by both parties. Alternatively, a joint venture could take the form of one of the entities separately investing in the other entity’s subsidiary, or separate “startup” entity. Moreover, a joint venture could simply take the form of a contractual agreement that allocates costs, responsibilities and liabilities in their common endeavor.

In a joint venture, each party may contribute value to the arrangement in the form of financing, intellectual property, market access or other assets in order to capture a market or business opportunity while distributing the costs and risks between the parties, as negotiated. Similar to a merger, each participant in the joint venture should engage qualified consultants and advisors in connection with performing due diligence on the other entity and the proposed structure in order to adequately assess the potential risks and viability of the proposed transactions and relationship.

As the contractual rights, responsibilities, tax implications, ownership, management and eventual exit of each joint venture is unique to its purpose, many joint ventures are formed as limited liability companies in which the unique aspects of the operation can be identified in detail rather than deferring to local law to control. The parties often prepare an initial non-binding term sheet (or memorandum of understanding) and eventually enter into separate contractual arrangements, which may include an operating agreement that dictates the ownership rights of each party, an exclusivity agreement, intellectual property (IP) assignments, services or distribution agreements, and confidentiality and non-competition agreements. Depending upon the nature and scope of the joint venture, the parties may need to consider potential antitrust issues that may arise, accounting for those prior to commencing operations together.

Acquiring a Company

You may find that the strengths your company is seeking to develop within its own business in the United States might be developed less expensively and more efficiently by simply acquiring that strength from another business and integrating it into your own structure. An acquisition may mean purchasing a majority or all of the outstanding stock of a target company, and this move would give you ownership control of the existing target company, or it may mean simply purchasing the assets necessary to develop a particular strength in the company without your assuming ownership of the target company.

When considering how you want to acquire a company, several factors should be considered related to the ability to effectively make use of the strengths that the target company has to offer your organization. For example, one advantage of a stock purchase is that the target company is essentially handing over the keys to a fully intact company, including its employees, facilities and intellectual property; whereas, in an asset purchase, your company will need to pick and choose which assets to bring into its operations and need to document such acquisitions to various IP assignments and employment agreements. An asset purchase may be more desirable in many instances because the acquiring company can limit the liabilities of the target company that it will be subject to and, in many ways, limit the risks associated with acquiring an existing company.

Merger and acquisition transactions can take many forms and structures; their form will be shaped by tax and accounting considerations. These transactions happen when participants believe that a new combination or acquisition of assets will create value, advance the synergy of the staff or accelerate an enterprise. Generally speaking, there is a distinction made between (1) a merger, in which one or more legal entities is combined or restructured into a new entity in connection with the purchase of the target business, and (2) an acquisition, in which one entity (A) purchases a majority or all of the outstanding stock of the target company (which would provide ownership control of the existing target company), or (B) purchases identified assets (and assumes identified liabilities) of the target company. As a practical matter, the traditional distinctions between the terms merger and acquisition are often not helpful without more detail as to the actual structure of the transaction.

Arizona law permits an entity to acquire another entity, whether by consolidation, stock acquisition or asset acquisition. Generally, when a merger takes effect, the existence, title to property, liabilities, court or administrative proceedings, and shares and other securities are merged into (or continue with) the surviving entity. Arizona requires board approval of a merger plan or share exchange, and in some cases requires the board to submit the plan to its shareholders for approval. In general, foreign entities may merge with or into an Arizona entity, provided the transaction complies with the law of both jurisdictions. The plan of merger or exchange must be filed with the Arizona Corporation Commission to become effective. Mergers and acquisitions are also subject to federal and state antitrust laws.

If a shareholder of a private entity disagrees with (or dissents from), among other things, a sale or disposition of all or mostly all of the corporation’s assets or a merger of the corporation with another corporation, subject to certain limitations, the shareholder may – by complying with certain notice and other statutory requirements – require the corporation to purchase his or her shares. If the corporation and the dissenting shareholder cannot agree on a value for the shares, the corporation must engage a court in determining the shares’ value.

5.4: HOW TO FIND QUALIFIED EMPLOYEES

CNBC, a major national news outlet, recently ranked Arizona’s workforce higher than any other state in terms of training, quality and availability of workers – while maintaining one of the lowest costs for labor in the nation.

In Greater Phoenix, our colleges and universities produce some of the best talent in the nation. Additionally, because the population is growing, talent is always moving into the market and there are many avenues to finding the right employees. The universities and community college system are a great network to tap into and these entities are likely to help a company find employees or institute training programs to ensure the next generation of graduates meets our market’s corporate needs. Additionally, there are several popular job fairs, online and print job sites on which to post vacant positions as well as several staffing agencies whose primary role is to assist companies with their hiring needs.

Staffing Agencies

Many staffing firms also offer a Recruitment Process Outsourcing (RPO) model. When businesses hire a staffing or RPO staffing firm, the firm works on behalf of the company to locate candidates, screen resumes and recommend qualified candidates based on the open positions in the company. It is then the company’s responsibility to interview, perform final screening and background checks, and manage the hiring process.

Another option is to outsource your entire recruiting process to a staffing or executive search firm – even if you prefer to use a contract employment model. These firms have the knowledge, experience and capability to handle any or all of the recruiting process.

Additionally, using contract personnel is a way to staff your company quickly without the commitment and expense of hiring employees directly on your payroll. Contract employees are employed by the staffing firm, and are be billed per hour worked for these employees. Rates can vary greatly, depending on the expertise of the staffing firm, the length of time they are to be employed by the firm, the types of positions being filled and the number of positions being filled.

Picking the right firm is important; you will want to find one that is well versed in your industry, well versed in the types of positions you are trying to fill and one that can handle the size of your project.

This Guide – Doing Business in Greater Phoenix, U.S.A. – can be downloaded at www.gpec.org.

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