Monthly Archives: November 2022

One of the most critical questions in startup decision-making is probably, “What is the best legal structure for my business?” The entity you eventually select will have legal, operational and financial implications, so choosing the right fit for your business is a crucial step.

There is no doubt that a lot of blood, sweat and tears, along with a little bit of luck here and there, will pave the way for success. However, giving proper attention to choosing the right business structure will provide the foundation for this success as you move forward.

Why is it important to choose the correct structure for my business?

Selecting the right structure is vitally important, not only in terms of legal and operational risk, tax obligations, asset protection, legal costs and your clientele, but also in terms of accommodating future growth. Changing legal structure down the line is possible but it can be extremely complex, so making the right decision in the early days will save you a whole lot of stress.

The choice of corporate structure may seem overwhelming and each with their own pros and cons. Here we are going to explore the options of a dual company structure, comprising both holding company and operating company, SPV and offshore option.

Company Structure Diagram Example

What is a holding company and why would you need it?

The core purpose of a holding company is to control another company rather than engage in business endeavours. In doing so, holding companies own the important business assets on behalf of the operating company so they can keep your golden nest egg safe and secure.

Because the operating company deals with all aspects of contract management, employee hiring and client relations, they bear the burden of liability. While this structure may be a costlier option, the benefits of minimising shareholder risk as well as protecting business assets and interests tips the balance in terms of negatives and positives.

Clearly, certain types of business will benefit from this structure over others:

• • Intellectual Property – Your business may own extremely valuable IP (trademarks, patents, branding or copyright) so it makes sense to protect this via an IP holding company.
  • Trade Risk – Asset protection is a major concern when operating in a high-risk sector, such as a heavily regulated industry, which is addressed by establishing a holding company.
  • External Investment – A dual company structure is a very attractive proposition for external investors due to the separation of their investment from the operating company’s trading risk.

Do Special Purpose Vehicles (SPVs) offer a better solution for my business?

SPVs are passive holding companies, that offer an extremely flexible solution to structuring your asset holding and investments. The ability to isolate financial and legal risk by ring-fencing specific assets and liabilities is an attractive proposition for many business types, uses and industries. Further, as SPVs are corporate vehicles, they can be used to establish subsidiaries, project or JV vehicles.The benefits of an SPV are clear in terms of minimising financial risk, direct asset ownership, tax savings (dependent on where the vehicle is created) and a straightforward process in terms of setting up the SPV. Looking ahead to the future, be mindful of potential regulatory changes that may impact your operations if you select this structure.

What do I need to consider in terms of ownership structure?

Founders should have a clear vision of their ownership structure at business inception and look at how this will be regulated going forward. Establishing the right shareholdings for your business in the early days will help avoid potential issues down the line. If you are intending to use equity to raise funds, beware of over-promising or over-issuing shares, setting overly generous investor terms and remember that shareholders may come and go.Business governance is another key factor. How the business is run, who makes the big decisions and how disputes are dealt with should be defined and documented. This is usually done via a shareholders’ agreement, supplemented by the memorandum and articles of association. From a shareholder/investor viewpoint, it’s important to lay out how and when they can exit and establish an appropriate ownership structure if the goal is to IPO or sell the company.

Which jurisdiction is the best home for my business?

Choosing the best jurisdiction very much depends on where you plan to conduct your core business activities, the location of your investors and where the company will be managed from. In this article, we are focusing on the UAE, BVI and Cayman, which are popular jurisdictions for start-ups, but many other options are available too, such as Cyprus, Belize, Singapore and the Bahamas.

Before you select your holding company jurisdiction, consider:

• Taxation – Explore tax obligations, particularly if there any double taxation agreements (DTAs) impacting the holding company and any subsidiaries or operating entities.
• Economic substance – Address any compliance matters with economic substance regulations, which require a company to have both economic and commercial substance in the jurisdiction.
• Nature and location of underlying assets – Choosing the most appropriate jurisdiction will depend on the nature of your underlying assets, i.e., equity holding, IP, leasing or financing.
• Access to professional/financial services – Assess whether the geographical location is accessible to shareholders and directors, if robust legal systems are in place as well as any cost or governance requirements you need to meet.
  Holding companies in the UAE are typically set up in free zones (primarily ADGM, DFIC, DMCC, RAK or JAFZA) but, following changes to commercial company ownership, you can also opt to launch on the mainland in Dubai, Abu Dhabi or one of the remaining emirates. The UAE is politically stable, well-positioned globally and has a strong economy. Offering tax benefits, asset protection, 100% ownership, flexible corporate laws and robust support services it almost seems like a no brainer!

If you decide to go down the SPV route via ADGM, you will find a flexible, straightforward option that is attractive to a broad range of businesses and individuals. Bear in mind that there is a requirement for SPVs to show a connection or ‘nexus’ to ADGM, the UAE and/or the GCC region in addition to no option to conduct operations or appoint staff members with this vehicle.

If you are looking to launch offshore, then BVI and the Cayman Islands offer similar advantages in terms of tax neutrality, flexible and modern corporate laws, sophisticated service providers and well-respected judiciaries. The core differences between the two are that BVI can be more cost-effective and flexible, whereas Cayman is well-known to private equity investors due to the high volume of publicly listed companies it attracts.

Can I use my holding company to operate my business?

Holding companies are not allowed to engage in any standalone commercial activities, so you would not be authorised to produce or sell any goods or services with this structure. Therefore, you would need to incorporate an additional ‘operating’ company. Consequently, it is costlier to implement and maintain but an operating company provides the ability to trade, secure contracts, hire staff and engage with clients as a subsidiary of the holding company.

Key takeaways

• Structuring your business correctly at the outset is one of the most important things you can do to help prevent issues down the line and is the foundation for success.
• Do your research, consider whether a dual company structure, SPV or an offshoring solution would be the best fit for your start up and future operations.
• Secure professional legal advice to make sure you make the best choice for your business and relieve the pressure of navigating the trickier aspects of your startup’s inception.

Raising capital for a startup in times of economic expansion and prosperity is tricky enough, and in periods of economic downturn, it’s even harder. An investor’s appetite for investment and risk lowers considerably as they adjust their priorities in such circumstances, and they are also more careful in ensuring their investments provide a good return on investment (RoI).

Now, every company is unique, and each will face different challenges, so the impending recession won’t affect everyone in the same way. However, common questions arise from entrepreneurs in this situation: how can I secure funds in difficult times? How do I deal with the prospect of lower valuations? What is the best approach when my clients become cautious in their buying decisions? Are there any opportunities for growth?

For startups, the ability to recalibrate in difficult circumstances is critical. While it may seem somewhat counterintuitive to move forward in an economic downturn, here are some of the ways that this can be achieved. After all, economic downturns are an opportunity for resilient startups to really shine, and separate themselves from the crowd. Here’s how:

1. Redefine what success means – Founders need to adopt a different approach when navigating an economic downturn. While success for your startup may have once been equated to becoming a unicorn, it’s perhaps time to redefine what exactly success is.

Looking back to previous downturns and what happened to tech companies listed on NASDAQ and the S&P500 paints an interesting picture. Stocks went from bullish markets and sky-high share prices right down to fair market value or bear markets as they are sometimes described. Now, it’s not necessarily a bad thing when markets go bearish, as it provides the opportunity to reevaluate what the real fair market value of your shares is, and it also gives you a chance to correct and rethink the process. Essentially, it allows us to figure out what is the real value of what we are buying.

Such circumstances also provide an opportunity for founders to ask, “Am I raising at the right value, or is my valuation inflated and full of hot air?” After all, company valuations should only be a side factor- it’s more important to be open to change and resilient as you advance forward. Focus on establishing a sustainable company that is unit economic-positive, prioritize your customer’s wants and needs, while also maximizing opportunities to scale up and grow. Of course, the key to successfully spinning all these plates in your startup’s journey is in having the right team, board, and partners by your side. Their contributions will help you balance these many challenges, and stay on course to follow your guiding star.

2. Keep a closer eye on your financials – Ensuring you have robust control of your cash burn is vital during a recession, as, inevitably, client growth slows, and fundraising becomes more difficult. Controlling costs and examining the level of RoI on all business activities, with a view to extending runway, can help startups to navigate this turbulence.

As an entrepreneur, you may also face the prospect of raising capital at a lower valuation. While this is not an ideal situation, investors will be more impressed by a sustainable company that delivers added value to customers over one with an inflated company valuation for no good reason. Perform due diligence on investors, and have the mindset that investors should be pitching to you for your big idea, and not the other way around. This will ensure you attract the right investor who is aligned with your mission and vision for the business.

If you have two or more years of runway, then it’s even more important to play hard and not be defensive. If your business has a healthy balance sheet, then cutting spend may compromise the momentum of your startup. Executing and adapting your strategy in line with customer behavior can provide competitive edge. Competitors may be extremely cautious during the economic downturn, so being aggressive in terms of raising capital could offer the opportunity to boost your presence as well as increase market share.

3. Prioritize your clients - The customer is king. Providing customers with what they want and when they want it is the primary way to retain key clients, as well as to sow the seeds for future client growth. Growth in the client base will inevitably slow during a downturn, so it’s vital to be laser-focused on the finer details, and listen intently to your customers.

Pivoting your business toward new markets and products and/or services is another way to address the impact of an economic downturn. Consult with new, existing, and potential clients via focus groups, pop-up surveys, and beta testing, and then focus on optimizing product-market fit. Plugging this research into your product roadmap is a great tactic both in the short term as well as in realizing your long-term product vision.

4. Unlock M&A potential – It’s generally accepted that mergers and acquisitions (M&A) and other deal activities are likely to nosedive during a recession. However, focusing on an offense-driven M&A can lay the foundation for a startup’s success as the economy recovers. Being acquired by a complementary business, or acquiring one, is a great way for a startup to increase the scale and (potentially) scope of the business, in addition to providing the opportunity for a subsequent divestiture or spinoff.

Declining valuations and failing startups will provide resilient entrepreneurs with the opportunity to integrate target acquisitions, with potentially outstanding teams and valuable client networks up for grabs. For startups that are reasonably strong financially and strategically, taking advantage of the downturn is a great way to enhance your portfolio, and start unlocking the potential of M&A.

5. Grow efficiently - Critical to achieving success in today’s business environment is to constantly look at ways you can do things better. Taking time to analyze and evaluate your core business processes will provide the opportunity to boost efficiency and effectiveness.

In the fast-paced startup world, this can often be overlooked or pushed to the back of the priority list, but in the long term, it can provide you with improved business agility and competitive edge. Look at improving your recruitment processes, streamline/optimize the client pipeline, and promote best practice approaches across the team.

6. Attract and retain key talent - Economic downturns inevitably lead to hitting the brakes on recruitment and compensation, but actually it may be the best time ever to capitalize on these areas. The good news is that as many organizations let go of talented staff and batten down the hatches on their talent pipeline, the playing field is left open for you. Now is the time to tap into this wider pool of talent.

Investing and engaging with existing employees who offer value to the organization is also critical. Creating a positive employee culture may by trickier in times of remote working, but these efforts can be extremely valuable in leaner times. If you don’t have the cash on hand for any recruitment activities, employee incentives can provide a great solution, such as offering more equity in relation to salary.

Talent acquisition also extends to your senior leadership team. The number of outstanding C-level executives available due to redundancies or seeking new challenges is also an amazing resource. It’s important to review your executive teams’ skills, capabilities, and performance, while also being on the lookout for talented leaders who will make a positive impact on your business.

To summarize, here what’s you need to remember as you and your startup move ahead in our current circumstances:

As Winston Churchill famously said: “Never waste a good crisis.” Use this crisis to really look at your business, and then, enhance your playbook. Investors will view this as an extremely valuable asset.

Research has found that companies make more dramatic gains or losses during downturns than during stable periods– remember that Uber and Airbnb were both founded during the last financial crisis.

Founders need to adopt a different skillset when navigating a recession. Rather than focusing on growth, it’s important to have refined and precise control and management of the business.

Consider how much cash runway you have available, whether your growth strategy is cash-efficient, evaluate the strength of your product-market fit, look at what your competitors are doing, and make positive internal changes in terms of employees, processes, and projects.

Focus on establishing a sustainable company that is unit economic-positive, prioritize your customer’s wants and needs, while also maximizing opportunities to scale up and grow.

AUTHOR BIO

Suraya Turk is the Managing Partner of Legal Circle, a UAE-based law firm uniquely positioning itself as a frontrunner in the area of technology in the vital sectors. Legal Circle provides startups, SMEs, multinational companies, and government entities with practical and innovative legal and commercial solutions to navigate and develop the regulatory landscape. As a former Managing Director of international and local law firms in the UAE, and prior to that as an Australian qualified lawyer, Suraya has led law firms and legal specialist teams. She is currently leading and cementing Legal Circle’s strong reputation for being an agile, nimble, adaptive, and innovative law firm which provides practical legal and innovative commercial solutions for clients. legalcircle.co